How Long Should I Wait Before Filing for Bankruptcy?

It’s a myth that struggling consumers knowingly spend beyond their means. On the contrary, debt has a tendency to sneak up on most people little by little, day by day. Often times, you don’t notice how large debts have become until they’ve grown far beyond what you can reasonably repay.

Just as it’s difficult to identify the moment your debt becomes more than you can manage, it can be difficult to pinpoint the best moment to file for bankruptcy. Should you file now or later?

In most cases, the sooner you file for bankruptcy, the better off your finances will be. Filing for bankruptcy can protect your assets, stop creditor harassment and allow you to begin rebuilding damaged credit. However, there are a few circumstances in which it might be a good idea to wait.

You’ve Recently Made Major Purchases

Bankruptcy courts take a close look at recent purchase to make sure debtors aren’t committing bankruptcy fraud. For instance, you can’t put a $1,000 TV on your credit card just before filing in hopes that, when your debts are wiped out, you’ll end up with a free television set. You also can’t give priority to lenders – such as by paying back a relative – in order to avoid including them in your bankruptcy.

If you’ve made large purchases, payments or transfers in recent months, the bankruptcy court may decide to undo them. Even worse, they could result in your case being dismissed altogether or you being convicted of bankruptcy fraud.

So how long should you wait before filing for bankruptcy after certain transactions?

In general, you shouldn’t file bankruptcy within:

• 90 days of putting $550 or more in luxury goods on any one credit card
• 70 days of making cash advances of $825 or more on any one credit card
• 90 days of paying $600 or more to a commercial creditor or within a year of making a debt repayment to a relative or business associate
• 2 years of transferring property, such as giving it away or selling it for less than it’s worth. This is to ensure you aren’t trying to hide property from the bankruptcy court.

You May Be Able to Modify Your Mortgage

One of the biggest advantages of bankruptcy is its ability to stop foreclosure, thanks to the automatic stay. Many Americans have been able to keep their homes by filing for Chapter 13 bankruptcy, in which assets are protected while debtors make payments on debt over a three- to five-year period under a negotiated Chapter 13 repayment plan.

Often times filing for Chapter 13 bankruptcy is a more realistic solution than mortgage modification, simply because not all lenders are willing to work with borrowers to modify their home loans – and even when they are, they may not be willing to lower payments enough to make them substantially more affordable.

However, if you believe your lender is willing to negotiate a more realistic mortgage payment, it may be worth waiting to file, as lenders often won’t work with debtors who have filed for bankruptcy. 

Once your lender has agreed to the new terms, make sure they are approved and finalized. If you are still in the trial-period of your modification, filing for bankruptcy could void your new mortgage payment. Your best bet is to speak with your lender about whether filing for bankruptcy could disrupt your modification application.

Your Recent Income Has Been High

For people with large amounts of unsecured debt and few assets, Chapter 7 bankruptcy is often the best strategy because it eliminates debts quickly and completely without requiring repayment. However, in order to file for Chapter 7, your income will need to be low enough to meet qualification requirements.

If your income has recently dipped due to a pay cut or layoff, you may be able to qualify for Chapter 7 even if your paychecks were previously too high. However, you may need to wait a few months so that several months of decreased income can be included in the means test that the court uses to determine eligibility.

Of course, even if you are unable to qualify for Chapter 7, Chapter 13 bankruptcy may still be able to help you get out from under your debt.

Because every financial situation is different, every bankruptcy case will be different. If you’re considering filing for Chapter 7 or Chapter 13 bankruptcy but aren’t sure if now is the right time, speak to an experienced bankruptcy attorney. When you sign up for a free personal debt evaluation, our DebtStoppers bankruptcy lawyers will determine if – and when – bankruptcy is right for you and your family.

Resources:

Should I File Bankruptcy Now or Wait? Nolo.com