Hurry or Wait? Reasons One Waits Before Filing Bankruptcy

The first part of this post discussed reasons people file bankruptcy quickly. Today, I continue by discussing some of the numerous reasons people wait some period of time before filing bankruptcy. As noted in the prior post, the timing of filing a bankruptcy case can be a complex decision. Even within one case there can be reasons to move quickly and reasons to move slowly. Knowledgable bankruptcy counsel can be of great assistance in balancing these competing concerns.

Waiting Before Filing Bankruptcy

Much waiting is associated with altering the impact of known historical facts. Less frequently, waiting might be designed to see what happens in some regards. Waiting also provides the opportunity to gather money to pay the fees and costs of filing a bankruptcy case, and to perform careful investigation of facts.

1. Transfer Look-back Periods

The bankruptcy code allows trustees to reverse certain transfers of property which occurred prior to filing bankruptcy. When a trustee goes after a preferential transfer, he or she seeks to prevent one creditor from being repaid more than its share. In case of a fraudulent transfer, the concern instead is that the debtor depleted his or her assets by transferring them away. Different types of transfers have different look-back periods, after which the transfer becomes too old to be reversed. Depending on the transfer, a period of 90 days, 1 year, 2 years, 4 years, or even 10 years might be applicable. The longer periods are less frequent concerns.

Certain transfers designed to hinder creditors can also affect the debtor's ability to obtain a bankruptcy discharge if they occurred within the year prior to the bankruptcy.

2. Discharge Eligibility and Other Second Bankruptcy Issues

If a person has previously received a bankruptcy discharge, he or she might wait to file a new bankruptcy case so as to obtain eligibility to get a second discharge. Depending on the type of bankruptcy filed, this might be a 2 year, 4 year, 6 year, or 8 year period. Sometimes, a debtor might wait until time passes since the previous dismissal of a case to obtain the full benefit of the automatic stay in the new case.

3. Past Income

A central aspect of the statutory bankruptcy means test is the six-month income average known oddly as "current month income" (CMI). An unusual bonus, large amount of overtime, or a past higher-paying job can throw CMI out of balance with reality. Sometimes, there is an opportunity to show that some other income measure is a more fair representation of income. Other times, waiting until the income average declines provides a more favorable and predictable result.

4. Claim-Related Timing

The treatment of certain types of claims becomes more beneficial to a debtor with the passage of time. After a car loan is 910 days old, the debtor gains the ability to pay off the debt in chapter 13 using the value of the car instead of balance of the loan. A similar rule applies for other non-car purchase loans once one year has passed. Subject to a complex set of rules, some tax debts lose both their status as a priority claim and their status as a non-dischargable debt once they reach a particular age. Once 90 days have passed since the purchase of luxury goods or 70 days since a cash advance, the creditor loses the benefit of an extra presumption should they contest dischargability.

5. Favorably Changing Facts

A great many facts come together to influence exactly what happens in a bankruptcy case. Sometimes facts such as values of property are changing with time, and would appear to be heading to a factual place that would improve a debtor's bankruptcy case. However, changing facts can also be a reason to file quickly, as discussed in the first part of this post.

6. More Fully Developed Information

Speaking broadly, the possibility of surprises adds risk to bankruptcy. Sometimes it makes sense to wait and see how things develop and perhaps get valuable information that can benefit the bankruptcy case.

7. Exemptions and Venue

Sometimes, a debtor might wait until they have resided in North Carolina for 730 days in order to be eligible to claim North Carolina exemptions. If an objection to venue is a concern, a debtor who has moved very recently might wait until they can properly satisfy the venue requirements for the federal judicial district in which he or she desires to file his or her case. For an individual, the venue requirement looks at the residences or domiciles in the 180 days prior to the filing of a case. If the debtor moved, proper venue is the district in which he or she was located for longer than any other district during the 180 days.

Isn't there risk in waiting?

Individuals contemplating bankruptcy are often barraged with threatening calls and letters from bill collectors, and face many demands for payment. The credibility of these threats and the toll they are taking are important considerations when timing a bankruptcy filing. When waiting looks favorable, there are two important things to consider: (1) wait only on the of advice bankruptcy counsel who can assess risks involved; (2) move forward on preparing to file, so the filing can be accelerated if necessary.

Even if you think your situation is one where you might need to wait prior to filing, I would never encourage waiting to get a free evaluation. A mistaken delay might miss the best chance to file.