The Best Time to File for Bankruptcy

While it sometimes is too early to file bankruptcy, it is never too early to determine if bankruptcy is a client's best choice, especially when a client owns a home or vehicle or where court judgments are, or will soon be, entered against a client. Bankruptcy can stop a pending eviction proceeding, but there are few to no rights in bankruptcy after a Court has ordered the eviction.  Filing bankruptcy is too late after a foreclosure sale or seizure of a bank account.

While advanced planning is always the best, there are often options if a client seeks help at the last minute before a foreclosure, repossession, or garnishment. Bankruptcies, in an emergency, can be potentially filed quickly by completing the bankruptcy petition, a statement of the Social Security number, and a list of the names and addresses of the client's creditors. The emergency bankruptcy also requires an approved budget and Certification that the client completed the required credit counseling briefing before the case can be filed. Additional forms and schedules must be completed shortly thereafter.

If clients are not facing immediate loss of property or having judgments entered against them and know that they will likely incur new unaffordable debts for unavoidable, reasonable necessities in the near future, it may be best to delay a bankruptcy filing until those new debts are incurred.  Clients should delay these payments and purchase these types of essentials in installments before filing bankruptcy.

The reason for this is that debts incurred after the bankruptcy filing are not discharged in that bankruptcy case. For example, if a consumer will be incurring substantial medical debts and does not have adequate insurance, it may be wise to wait to file until after the medical condition has been resolved or the debtor has sufficient health insurance before filing for bankruptcy protection. I.e., pre-bankruptcy expenses for medical care and other essentials are rarely challenged for being incurred in “bad faith” as sometime happens when significant debts are incurred for non-essential goods and services.

Bankruptcy rules require that debtors have to wait eight years from filing a Ch. 7 bankruptcy case in order to receive a discharge of any new debts incurred in a subsequent Ch. 7 bankruptcy case.

If a consumer has is suing any person or entity for a significant sum of money, or has a right to file such a lawsuit, the consumer's rights to recover all the money he/she is entitled to receive from said lawsuit may have to be turned over to the trustee appointed by the Bankruptcy Court.  Depending on how much of the lawsuit’s proceeds can be protected by the numerous exemptions provided by the US Bankruptcy Code, part of the proceeds may have to ultimately be paid to the debtor’s creditors.  For this reason, it may be better to wait to file a nonemergent bankruptcy until after the lawsuit proceeds are received, if the consumer is indeed still in need of filing for bankruptcy relief.

Before filing bankruptcy, clients should not go on expensive vacations or credit card shopping sprees that they do not intend to repay. In a chapter 7 bankruptcy, debts incurred in this way may be declared as nondischargeable and the client’s entire bankruptcy case might be placed in jeopardy of being dismissed.