If you are planning to file for bankruptcy, in some cases it makes sense to do so as soon as possible. In certain circumstances, filing for bankruptcy immediately can stop a foreclosure, repossession, or wage garnishment, help you keep more property, allow you to discharge more debts, or even help you qualify for Chapter 7 bankruptcy.
Below are the seven most common reasons that people benefit from filing for bankruptcy sooner rather than later. (For a list of situations in which you should consider delaying your bankruptcy filing, see Top 10 Reasons to Delay Filing for Bankruptcy.)
1. The Bank is About to Foreclose on Your Home
If your bank is about to foreclose on your home, you can put an immediate stop to the foreclosure with bankruptcy. When you file for bankruptcy, the automatic stay prohibits lenders and creditors from continuing collection actions against you, including foreclosure proceedings. (However, unless you can quickly get current on mortgage payments quickly, Chapter 7 ultimately will not help. Only Chapter 13 lets you catch up on mortgage payments through the bankruptcy.) To learn more, see Bankruptcy's Automatic Stay and Foreclosure.
Even if you don't plan to keep your home, you still might want to file for bankruptcy before the foreclosure is completed in certain circumstances. If the foreclosure sale proceeds aren't sufficient to cover your unpaid mortgage balance, you'll owe the difference (called the deficiency). In some states, the deficiency is forgiven. Or the bank might forgive this amount. If that happens, you may owe income taxes on the forgiven amount. Once you owe the taxes, they are difficult to discharge in bankruptcy. To learn how to avoid this problem, see Should I File for Bankruptcy Before or After Foreclosure?
2. Your Lender Is About to Repossess Your Car
Bankruptcy's automatic stay also puts an immediate stop to any efforts by your lender to repossess your car. this temporary stay might give you time to catch up on payments in Chapter 7. In Chapter 13, you can include back payments in your plan. (To learn more, see Can the Lender Repossess My Car During Chapter 7 Bankruptcy and Car Repossession and Chapter 13 Bankruptcy.)
3. You Have Just Moved to a New State With Less Favorable Exemptions
You do not have to give up all of your property in bankruptcy. Each state has a list of exemptions that you can use to keep some or most (or even all) of your property. To learn more about how to use exemptions strategically, see Bankruptcy Exemptions: An Overview.
If you have just moved to a different state, and the exemption laws in your new state won't let you protect as much property as the exemption laws in your old state, you'll want to file for bankruptcy soon. Which state exemptions you can use in bankruptcy depend on your "domicile, " and in most cases you use your old state's exemptions when you've moved recently. File before you lose the "domicile" of your old state. (To learn more about domicile requirements, see Which Exemptions Can You Use in Bankruptcy.)
If, on the other hand, your new state's exemptions are more favorable to you, consider delaying your bankruptcy filing until you've established domicile in the new state.
4. Your Landlord Is Trying to Evict You
A bankruptcy filing also puts an immediate stop to most evictions. Although you will ultimately have to pay your rent to stay in your rental unit, a bankruptcy filing will buy you time. If, however, the landlord already got a judgment for possession (an eviction order from the court), then bankruptcy won't help. And if you are being evicted for drugs or a few other reasons, bankruptcy won't stop the eviction either. (For details, see Evictions and the Automatic Stay in Bankruptcy.)
5. You Want to Stop a Lawsuit Against You
If you are being sued for medical debt, credit card debt, car accident damages, breach of contract, or even for patent infringement, a bankruptcy filing will put an immediate stop to these lawsuits. It makes no sense to pay to defend these lawsuits if you can have the debt discharged anyway. But it is important to note that a bankruptcy will not stop all lawsuits. To learn more about which types of court action bankruptcy will not stop, see Exceptions to the Automatic Stay in Bankruptcy.
6. You Recently Started a Higher Paying Job
In order to qualify for Chapter 7 bankruptcy you must pass the means test. Your income is important -- the means test looks at your average income over the six month period before you file. The higher your income, the less likely you'll pass the means test. (Learn how the means test works.)
If you recently started a higher paying job, your means test average income increases every month that you wait to file. This is because for every month that passes you must include the higher income for that month in your means test average income. Filing for bankruptcy sooner rather than later may help you pass the means test.
If, on the other hand, you recently lost your job, started a lower-paying job, or had your hours cut, it might make sense to delay your bankruptcy filing in order to pass the Chapter 7 means test.
7. You Expect to Receive Property Soon
Generally, you can keep property that you receive after you file for bankruptcy. So if you expect to receive property soon, such as a discretionary bonus, or an inheritance from a sick relative, it makes sense to get your bankruptcy on file right away so that the date of your filing is earlier than the date you receive the property. However, because keeping property that you receive after filing has some nuances, be sure to consult with a bankruptcy attorney if you are in this situation. (To learn more, see Property in Your Bankruptcy Estate for more information.)
