Bankruptcy - When is it a "good" time to file?

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When is it a good time ... the right time... to file for bankruptcy? I think this is probably one of the most important questions when preparing someone's case for  bankruptcy. Clients and attorneys need to look forward as well as in the past. This should be done as soon as someone realizes they are having financial trouble. This early review could give debtors options that can be missed by jumping too soon or waiting too long.

If a debtor files too early, I think an attorney may be setting their client up for problems down the road. Wait too long and a person can spend down savings and retirement money only prolonging a bankruptcy filing but not avoiding it ... or maybe wait long enough to miss qualifying for Chapter 7 and be forced into a Chapter 13 payment plan.

When clients come to me to discuss bankruptcy, I talk to them about their employment. If they are unemployed or hold a temporary position, I look for ways to delay filing without spending down assets. This is difficult since they are realizing they may not be able to pay new debts. I explore their prospects of new jobs and future financial plans with them. I want to help my clients prevent creating new debt after bankruptcy due to the lack of sufficient income.

Also, a review of the debtor's spending for the preceding 90 days is important. Some purchases can be presumed as fraudulent if a person files bankruptcy within 90 days of the purchase. While a creditor can still claim the same purchase was fraudulent after 90 days, waiting until 90 days have passed will remove the presumption. This is a better position for the debtor if the creditor challenges the discharge of that debt.

Problems with filing too late are more obvious. I cannot say how many of my clients have come to me after spending month and years trying to pay off debt before filing bankruptcy. Many times they have spent all their savings including their retirement funds. I recently met with a woman who spent her IRA  on debt, entered into a debt management plan, and made three years of payments. She managed to pay off three of her six credit cards before her bills overwhelmed her again. She is now three months behind on her mortgage. Now, she must chose between a Chapter 13 payment plan to keep her home or filing for Chapter 7 and giving up the house.

There is also a way to use Chapter 7 and then Chapter 13 but that is a topic for another blog article. The point is, after years of paying, it seems she is at the same point now as she was when she started the debt management plan three years ago. She may even be worse off. She is not the first person I worked with that has a similar story. There is no real way to know what would have happened if she filed three years ago but my thought is filing three years ago would have been better.

Besides spending money without any real benefit, a person who gets a new job with an increased salary can end up forced into filing under Chapter 13. Because he or she started earning an income above the median income, he or she can lose the option of filing under Chapter 7. If the person still needs bankruptcy protection, he or she will be forced to pay his or her remaining disposable income to unsecured creditors for five years.

I had another client who came to me and was fully employed after several years of illness and unemployment. He had built up significant debt. When he came to me, he was within a month of losing his eligibility to file for protection using Chapter 7. We filed his bankruptcy the last week of the month allowing him to use Chapter 7 and completing his case within months instead of years.

I had a third client who wasn't eligible to file for Chapter 7 protection because he was just over the median income but he was under-paying his child support. Once he was ordered to pay the appropriate child support, he dropped below the median income and made it through the "means" test. However, he was coming up on the time of the year he was eligible to receive his annual bonus, which was not a guaranteed figure.

But it didn't really matter because any amount would probably have placed my client over the median income again. By paying attention to past and future events, we were able to file a Chapter 7 bankruptcy case between the different pay events.

Not all cases require such specific timing. But people cannot know about timing issues if they are not looking for them. The parties need to look forward as well as what has happened in the past. Don't wait until the last moment if you are having financial problems. Talk to someone early about all your options.

If you want assistance, legal representation, or just want to know more about Mark Medvesky or our firm of Wells, Hoffman, Holloway & Medvesky LLP, check out our website at www.whhmlaw.com.

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