How to time your bankruptcy petition is dependent on several factors. At times it’s sensible to file a bankruptcy petition immediately, and other times it is beneficial to delay. For instance, if you’re facing imminent car possession or foreclosure, you may have to file for bankruptcy right away. On the contrary, if you’ll incur more debts in the recent future, you just moved and need to take advantage of the exemptions in your new state, or you’ll qualify for the Chapter 7 means tests in a few months, delaying your filing may make sense. In this article, you learn the different factors you should consider when deciding on the timing of your bankruptcy petition.
Generally, Delaying Filing Isn't In Your Best Interests
In many cases, waiting or delaying serves no beneficial purpose. People sometimes believe that by delaying filing for bankruptcy, they may solve their financial issues or find ways of catching up. Whereas these are admirable thoughts, they’re unrealistic if you're struggling with debts. Most debtors don't have a realistic opportunity of repaying their debts. So by delaying, they're only subjecting themselves to foreclosures, repossessions, bank levies, wage garnishment, and judgments.
If you're overburdened with debts, the earlier you declare bankruptcy, the earlier you'll rebuild your credit score and begin your life on a clean slate.
If you have tax debts that aren't dischargeable after filing bankruptcy, you'll likely be capable of paying back the taxes with no penalties or interest by declaring bankruptcy under chapter 13. But until you declare bankruptcy, the penalties and interest will keep accruing. Therefore, you need to stop procrastinating and take the necessary steps towards starting your life on a clean slate.
In certain cases, debtors seek to erase a second mortgage. However, a second mortgage is only erasable if the home's value is lower than the balance on the first mortgage loan. As real estate prices stabilize and begin going up, delaying your bankruptcy petition could lead to the home's value rising beyond the balance on the first mortgage loan. If that happens, your capability of wiping out your second mortgage loan is impaired.
At Times, Delayed Filing Serves Your Best Interest
In some instances, it's beneficial to delay filing for Chapter 13 or Chapter 7 bankruptcy. At times, declaring that you are bankrupt too early could mean having to file for chapter 13 rather than chapter 7 or losing property that you would've otherwise been capable of keeping. These are the various situations where it may make sense to delay bringing your bankruptcy petition, including:
If You Expect to Have New Debts Soon
It is ideal to delay bringing a bankruptcy petition if you predict other substantial expenses soon. Generally, bankruptcy under chapter 7 only wipes out the debts you have as of the date of filing for bankruptcy. Debts that arise later will be for you to pay, at times for several years into the future. For instance, if you’ll be having a knee replacement surgical procedure in the following year and you’ll need to pay all or some of the costs, the expenses will be erased if you delay filing bankruptcy under chapter 7 until after your surgical procedure.
If You Have Any Property That You Do Not Want to Forfeit
You might have assets that you’d lose under chapter 7 if you declare bankruptcy right away, but retain if you delay filing— or have ample time to sell them and utilize the proceeds. They include:
- Property that exceeds the exemption limit— assuming you have property worth more compared to the amount you are permitted to keep after bankruptcy filing through property exemptions. After some months before filing, the assets’ value could depreciate enough to fall under property exemptions. For example, assume you own an auto worth $7,000, but exemption laws permit you to retain a car valued up to $6,500 only. If you delay bringing the bankruptcy petition for some months, the vehicle’s value could depreciate by sufficient value to make it exempt.
- Tax refunds— let’s say you’re expecting a $4000 tax refund. You would need to give it to the bankruptcy trustee should you obtain it after filing. But if you obtain the tax refund first, spend it for some months on different essentials, then declare you’re bankrupt, you would fully benefit from the refund.
- Nonexempt property— assume you have nonexempt properties, to mean the bankruptcy trustee could take the assets and sell them to repay your creditors. Should you sell those assets for their fair market value before declaring bankruptcy, then spend those profits on essentials; you, instead of your lenders, would benefit from the assets. Assets, except for your car, house, clothing, household goods, are usually non-exempt. Alternatively, you may be capable of using the profits to purchase property that’s exempted from being put up for sale in bankruptcy, like a vehicle or burial plot. However, talk to a bankruptcy attorney before trying this alternative as it could land you into trouble in given circumstances.
If, Recently, Your Income Has Been High
When you declare bankruptcy under Chapter 7, the court examines how your income has been over the last six months in determining whether you’re eligible, using the so-called means test. If your income is so high, you could file for bankruptcy under Chapter 13 only. Chapter 13 requires that you repay part of your debt.
If recently, your income has plunged due to a layoff or pay cut, you could become eligible to declare chapter 7 bankruptcy by simply delaying filing for some months. After numerous months of reduced income are factored into the means test, your last six months’ average income might be lower enough to be eligible.
For instance, assume you’ve been earning an average gross income of $10,000 for the last six months. However, you were terminated from your job and are currently earning $3,000 in unemployment. Should you delay filing for bankruptcy for three months, the six-month average gross income will decrease from $10,000 to lower than $5,000, making you qualify for filing bankruptcy under chapter 7.
If You Have a Chance to Modify Your Mortgage
Nowadays, most people declare bankruptcy to hold up foreclosure. Whereas declaring bankruptcy is ideal, most people declare much earlier than they have to, making it more challenging to secure a mortgage modification. After you bring your bankruptcy petition, most lenders will decline to enter into or continue negotiations over your mortgage. Since your bankruptcy cancels the promissory note part of your mortgage (but not the lien on the house), you will technically be left with nothing to negotiate. In case you may wish to modify your mortgage in the days to come, you should probably avoid declaring that you are bankrupt— at least until you’re aware of what’s likely to happen with your mortgage.
We also have cases where you might need to consider waiting before filing, but you have to speak with a bankruptcy lawyer first. A delay in filing may remove the requirement to disclose asset transfer, closed bank accounts, or preferential payments. Similarly, by waiting before filing, you may do away with the assumption that particular debts aren’t dischargeable. But you should consult a skilled bankruptcy lawyer to ensure your action is in good faith and lawful. An activity deemed to be done in bad faith could have severe negative repercussions, including criminal prosecution and denial of discharge.
At Times Also, Expedited Filing Serves Your Best Interest
In certain cases, filing for bankruptcy without delay is an excellent idea. Below are the situations where you could file for bankruptcy right away:
-
If You’re Facing Imminent Foreclosure
You are likely to gain more if you declare bankruptcy before your lender forecloses your home because:
Filing for Bankruptcy Will Buy You More Time In Your Home by Holding Up Foreclosure
Should you file your petition before your house is sold at a foreclosure sale, you will have much time to stay in the house. When you declare that you're bankrupt, an automatic stay is effected. The stay is like a bar or an injunction against any efforts by lenders to enforce liens or collect debts, including doing anything related to pre-foreclosure.
The creditor has the legal right to request the court to lift the automatic stay. If the automatic stay is lifted, the lender will go ahead with the foreclosure. However, this procedure will still last a little longer. Since the automatic stay stops the foreclosure process from proceeding, you will have additional time to remain in the house. Meanwhile, you'll still be staying in that home.
You Could Save Cash During the Delay of Foreclosure
You can stay in your house without paying off any mortgage during the bankruptcy— at least until your lender receives relief from the stay and carries out the foreclosure. Alternatively, the lender may forgo this legal right and merely wait for your bankruptcy case to end before proceeding with foreclosing.
Either way, you will probably have a few additional months to stay in that home without paying, allowing you to increase your savings. Consider this scenario: if you make mortgage payments of one thousand dollars per month, you may save several thousands of dollars by remaining in the home and not making any payments during this period.
Bankruptcy Will Cancel Other Mortgage Debts
If you have other mortgage debts, such as a HELOC or second mortgage, bringing your bankruptcy petition before your home is foreclosed could be an excellent move to erase your liability for the debts.
When your first mortgage creditor finally forecloses, junior lenders (HELOCs and second mortgages, for instance) are also foreclosed and lose their security in real estate. As a general rule, if any junior mortgage lender is sold out this way, that lender could personally sue you to recover the debt. However, filing a bankruptcy petition eliminates any debts that a HELOC or second mortgage secured, and you could avoid future suits from the lenders.
You Can Avoid Tax Liability for Forgiven Debt
If your creditor forecloses and cancels the deficiency debt instead of seeking a deficiency judgment, you may need to include the canceled debt as income when filing tax returns. If this happens, you'll generally have to pay tax on the forgiven debt except if you're eligible for an exclusion or exception, like:
- The Insolvency Exception— if you were insolvent when your debt was canceled, all or some of that debt may be non-taxable to you. You are considered insolvent if your total debts (liabilities) are higher than your total assets' fair market value.
- The Mortgage Debt Relief Act of 2007— this Act and its different extensions exclude forgiven debts from your taxable income if:
- You took out the loan to substantially improve, build, or buy your primary residence.
- Your primary residence secures the loan.
To Summarize This Point
Should your creditor forgive the deficiency before filing a bankruptcy petition and you aren't eligible for an exception or exclusion that'd exclude the forgiven debts from your taxable income, declaring afterward will probably not eliminate your tax debts. On the contrary, if you bring your petition before foreclosure, your mortgage debt will be forgiven, and you will not face federal tax liability since there will not be any forgiven deficiency debts. Note, however, that forgiven debts may impact your state taxes.
You’ll Prevent the Lender from Obtaining a Deficiency Judgment If it’s Applicable In Your Case.
Here is how deficiency judgment works: when your house is foreclosed and sold, your total debt may exceed the foreclosure selling price. The difference between these two amounts (foreclose sale price and the amount you owe in debt) is known as a deficiency. Look at this example: let's assume your mortgage debt is $250,000, but after the lender forecloses your house, they sell it at $150,000. The deficiency will be $100,000.
Under California bankruptcy law, the lender can seek a personal judgment known as deficiency judgment against you to collect the deficiency. Generally, after the lender obtains the deficiency judgment, they may recover this amount through typical collection methods. For instance, they may compel your bank to withdraw funds from your account (bank levy) or require that your employer deduct a given amount of money from your paycheck (wage garnishment).
After foreclosing your house, your lender can collect the deficiency solely if they file a distinct suit against you. If the lender seeks to recover the deficiency and you declare bankruptcy afterward, bankruptcy discharges the deficiency. But for most people, it's more sensible to file bankruptcy prior to foreclosure to eliminate the mortgage debt preemptively. If that's the case, you won't have to be concerned about the likelihood of deficiency judgment. This technique will make you rest easy since after discharging your mortgage debt, you'll know you don't have to be subjected to a lender's suit to collect the deficiency once they foreclose.
What If You Have Transferred Property Out of Your Name?
Most people ask if they can declare bankruptcy right away or wait to transfer property out of their name. The answer is, it depends. There are valid reasons for transferring assets before a bankruptcy filing. But if you transfer assets out of your name before declaring bankruptcy, the bankruptcy trustee may be capable of avoiding the transfer and reversing the assets for your creditors’ benefit. Whether or not the bankruptcy trustee will manage to reverse the transfer of the assets largely depends on:
- When you did the transfer.
- Whether you transferred or sold the assets for lower than it’s worth.
- What you bought with the sale proceeds.
- Whether you aimed to commit bankruptcy fraud.
Delaying Bankruptcy to Protect Asset Transfer
If you did make a transfer that could enable the trustee to reverse the property or places you are at risk of losing, delaying bankruptcy could save you from these adverse consequences. However, it isn’t advisable unless you did the transfer to pay for essential goods.
Committing Bankruptcy Fraud Could Cost You
If your property transfer is intended to defraud your lenders, the court may deny your bankruptcy discharge. If the bankruptcy trustee discovers you transferred assets within a year of declaring bankruptcy intending to defraud, hinder, or delay your lenders, they have a basis to oppose your bankruptcy discharge. If you hid, harmed, or destroyed property, the trustee would also have a basis to object. Consequently, it isn’t wise to conceal or transfer assets to defraud your lenders before declaring bankruptcy.
You Could Sell Assets to Pay Your Bills
Not all asset transfers are unsuitable. If you wish to pay essential bills like utility bills or rent or want to buy food, you could sell your guitar, car, boat, or other assets and do so. And if you wish to declare bankruptcy right after you sell, you can avoid problems by:
- Selling the asset for what it is worth
- Keeping records proving you bought essential things with the money
Find an Experienced San Diego Bankruptcy Attorney Near Me
If you're unsure if now or later is the right time to file your bankruptcy petition, talk to attorneys at the Los Angeles Bankruptcy Attorney. We have seen it all. With the knowledge we have acquired after decades of experience helping clients file chapter 11, chapter 13, and chapter 7 bankruptcy in Los Angeles, CA, we can guide you towards the legal options that could serve you and your loved ones' best interest. Contact us today at 424-285-5525 to learn more or if you have questions or concerns on how to time your bankruptcy petition.
