Timing Your Bankruptcy Filing: When to Delay Your Petition
Learn when it's beneficial to delay filing for bankruptcy for a certain period of time.
If you know you want to file for bankruptcy, sometimes it's best to delay filing your petition. In some circumstances, waiting for a certain period of time before you file can help you keep more money, protect the money of another person (such as a relative), increase your chances of qualifying for Chapter 7, and more. Here are some of the situations when it might be best to delay the filing of your bankruptcy petition.
(To learn about other things to consider before filing for bankruptcy, see our Prebankruptcy Planning area.)
Paying Certain Creditors Too Close to Bankruptcy
A preference occurs when, within a certain time period before filing bankruptcy, while you are insolvent, you pay more than $600 in aggregate to one creditor and put that creditor in a better position than other creditors (you are "preferring" one creditor over another). For regular creditors, like a credit card company or a bank, the preference period is 90 days prior to filing bankruptcy. If the creditor is an "insider", which includes family members, the preference period is one year prior to filing.
If you make any of these payments during the specified time period prior to filing, your bankruptcy trustee will have the right to go to the creditor and demand the money back, which can be sticky when the creditor is a relative.
Example. Joe owes Bank $1,500. He pays bank $700 in a last ditch effort to pay it off. He can't make his finances work, so he files bankruptcy 62 days after paying the $700. The trustee will likely demand that Bank turn over the $700 to the bankruptcy estate, which has no effect on Joe.
Example. Chris owes his mother $5,000. He obtains a tax refund of $2,400, which he promptly pays to his mother because he feels guilty, even though he really needed the money. He can no longer stay afloat, so he files bankruptcy six months after making that payment to his mother. The trustee can demand turnover of the $2,400 from Chris's mother, and if she does not turn it over or come to an agreement with the trustee, the trustee can sue her and obtain a judgment against her for the money. If Joe had waited and filed bankruptcy after a year had passed from the date he paid his mother, the trustee would not have been able to demand the money.
(To learn more, see Clawback Provisions and Preferential Transfers.)
Recent Transfers of Money or Property
Giving away property or transferring money and receiving nothing in return within two years prior to filing bankruptcy may be viewed unfavorably, regardless of your intentions when you did so. This is called a fraudulent transfer, and although the name implies an intent to defraud, you do not need the intent. An innocent gift can still be deemed a fraudulent transfer just as well as an act of actual fraud.
Example. Allison has $10,000 in a savings account, which she doesn't want to lose. She is unemployed and in debt. She wants to file Chapter 7, but she read online that the trustee could take her $10,000 if she can't exempt it. To hide it from the trustee, she moves all the money to her brother's bank account and files bankruptcy six months later. This is actual fraud, and the trustee will be able to demand the money from Allison's brother.
Example. Trish wins $10,000 gambling. She gives $5,000 to her sister as a birthday gift. Almost two years later, Trish is broke and in debt, so she files bankruptcy. Because she filed within two years after giving that money to her sister, the trustee can demand $5,000 from the sister as a fraudulent transfer,
In either of these cases, waiting at least two years from the date of the transfer to file bankruptcy will prevent the trustee from trying to seize the funds.
For both preferences and fraudulent transfers, there are defenses that can be raised to defeat the trustee's claim; however, waiting to file bankruptcy is the surest way to avoid the situation in the first place.
Recent Credit Card Charges for Luxury Goods & Cash Advances
If you have used your credit cards recently, depending on what you used them for and how much you spent, you may need to wait to file bankruptcy. If you spent more than $650 on luxury goods or services on your credit card, for example, within 90 days before filing bankruptcy, there is a risk that the credit card company will ask the court not to discharge that debt, forcing you to pay it back despite the bankruptcy.
The same is true for cash advances aggregating more than $925 within 70 days prior to filing. So if you have used your credit cards for either cash advances within the past 70 days or purchases for non-essential things within the past 90 days, you should wait to file bankruptcy.
Creditors can still attempt to make your debt nondischargeable even if you make these purchases or advances more than the specified number of days prior to filing, but it will be more difficult to prove the case and less likely that the creditor will try.
Example. Trudy uses her credit card to buy a new fur coat costing $1,000. She should wait at least 90 days before filing bankruptcy or the credit card company will try to make the debt nondischargeable.
Example. Gary needs cash, so he takes cash advances from his credit card - he takes one advance of $500 and then another advance the following week of $900. He files bankruptcy 68 days after the second advance (which is 75 days after the first advance). The credit card company will likely try to get a court judgment stating that the second advance is nondischargeable. Gary should have waited a few more days to file.
(To learn more, see Prebankruptcy Credit Card Charges.)
Your Income Will Soon Decrease
When you file bankruptcy, you must complete a means test. The bankruptcy means test is a form that uses your income over the past six months to determine a number of important issues, such as whether you qualify for Chapter 7, how long your Chapter 13 plan must be and how much you must pay into the Chapter 13 plan. Because the means test is a calculation of your average gross income over the six-month period prior to your filing, waiting can help you file bankruptcy under more favorable circumstances. For example, if you lose a high-income job, waiting six months to file will help your average income go down, helping you get into a Chapter 7 or giving you a shorter and less expensive Chapter 13.
(Visit our Bankruptcy Means Test topic area for details on how the means test works.)
You Are Trying to Modify Your Mortgage
If you're working with your mortgage lender to modify your home mortgage, you may want to wait to file bankruptcy to see if the modification pans out. Bankruptcy will typically cause mortgage lenders to back out of loan modification programs and foreclose, unless you file a Chapter 13 and propose to cure the payment arrears.
You Expect a Windfall
Any property you own or money you expect to receive will be property of your bankruptcy estate after you file a bankruptcy case. To protect your property, you have to claim exemptions, which are available under either federal or state law. Different types of property can be exempted in different amounts, and some cannot be exempted at all. (To learn how exemptions protect your property, see our Bankruptcy Exemptions topic area.)
If you're expecting some sort of cash windfall, either from a tax refund, sale of property, inheritance, or lawsuit proceeds, waiting to file bankruptcy until after you receive the money and use it up may benefit you. Exempting large sums of cash is difficult, and if you cannot exempt it, the trustee can take it and use it to repay your creditors. If you wait until you receive the money and then spend it on necessities (such as car repairs, replacement appliances, dental work, home repairs, etc.), you will keep the benefit of the money for yourself rather than having to relinquish it to creditors.