When should you file bankruptcy?
A wise man once said that there is never a right time to say goodbye. That’s true for someone that you love, but absolutely not true for your unsecured debt. In fact, it may seem like the time is perfect — right now — to stop debt collectors in their tracks and clear out all of the debt. The time is now to give you a fresh start.
But wait: before you rush to file, are there any considerations that may make this the wrong time to file for bankruptcy and clear your debt?
A Few Words on Types of Bankruptcy Filings
Before we can discuss timing, it is important that you understand the different types of bankruptcy filings. The most common for individuals is a Chapter 7 filing – a legal proceeding that seeks to eliminate nearly all unsecured debt by liquidating your assets (other than exempt necessary assets, such as a car to get to work) to pay off some your debt. Once the assets are gone, the court will typically discharge the remainder of your debt entirely (with the exception of a few non-dischargeable or hard-to-discharge debts, such as student loans or alimony arrears).
The other major type of filings for individuals are Chapter 13 filings, where the court institutes a repayment plan to allow you to get back into the good graces of your lenders by paying back most of what you owe, while eliminating some of your lesser unsecured debt.
Wait until your major debts are known
Both of these types of filings seek to address debt that was incurred before you file — if you expect a major debt, tax, or real estate assessment to hit the books soon, unless you want to pay that bill, you may want to delay your filing until after the bill shows up. Make sure you’ve combed through your files and credit report to find every debt owed – anything not listed in the bankruptcy filing is not discharged.
What Happens When You Declare Bankruptcy? (Use the Automatic Stay to Your Advantage)
When a person files bankruptcy, an automatic stay is issued by the bankruptcy court that halts all debt collection proceedings, including foreclosure proceedings on one’s house and all of those annoying pesky letters about past-due utility bills and parking tickets that you get in the mail.
This is a very big benefit, far beyond the benefit of just silencing those annoying calls and letters. For example, if you are facing foreclosure on your house, filing a bankruptcy case buys you time to work with the lender on a modification or a short sale. It may also buy you time to negotiate your other debts – many lenders would rather take pennies on the dollar than have the debt discharged entirely through bankruptcy. Once they receive that notice of an automatic stay, much of the power in the negotiations falls into your hands.
Think of bankruptcy sort of like you holding them hostage with your finger on the button of a nuclear missile – while you may damage your credit severely by filing bankruptcy, you eliminate their ability to collect on the debt, and so long as you handle your post-bankruptcy financial life responsibly, your credit will recover in a few years’ time. With so much to lose for them, lenders would much rather negotiate for less payment than have a court decide that they get no payment at all.
How Do I Declare Bankruptcy?
While there are many free legal forms out there, and a few legal aid agencies that may be able to help, most people use the services of an attorney to make sure the bankruptcy is done correctly. The reasons for this may seem obvious, but they are worth highlighting: bankruptcy only discharges the debts that are included in the filing. If debts happen after the filing, or are not included on petition, or the paperwork is simply filled out incorrectly, you can miss your chance to discharge some significant debts and may end up in almost as bad of a position as you were before the filing – except this time you do not have the option of filing bankruptcy again to eliminate that debt.
An experienced attorney can also discuss with you alternatives to bankruptcy, such as negotiating down your debt with your lenders.
Whether you hire an attorney or prepare the paperwork yourself, bankruptcy starts with the petition filing. You will also have to complete significant additional paperwork, such as a list of all of your assets and debts. You will likely have to undergo credit counseling as part of your bankruptcy filing as well.
An important thing to remember is that all of this doesn’t have to be done before the automatic stay on debt collection proceedings kicks in. If it is an emergency, such as an imminent foreclosure, you are also able to file a “skeleton filing” where you have only the most basic information included in your petition in order to get that automatic stay to kick in immediately upon filing – and then follow up with an amended petition shortly thereafter. This strategy really needs the assistance of an experienced attorney to make sure you do not blow your entire filing by mishandling the skeleton filing and the follow-up, leaving you with no bankruptcy case or with significant debts omitted from the case.
When is a Bankruptcy Filing Appropriate?
It is hard, if not impossible, to recite every circumstance that might justify a bankruptcy filing. The point of bankruptcy is to eliminate debts that are so severe that you no longer have a chance at paying them back – where the amounts you owe are so substantial that there’s not a reasonable way for you to cover your daily expenses while making minimum payments or any payments whatsoever.
Some signs that bankruptcy filing might be appropriate include an abundance of debt that is already in collections for lack of payment, a pending foreclosure, or a history of barely getting by on minimum monthly payments on credit cards. (Exorbitant interest rates on credit cards mean that a monthly payment barely addresses the principal that you owe, while the interest will exponentially increase the amount that you end up paying by the time those “minimum payments” finally get your credit card bill back to zero).
Only you can make the call about whether filing for bankruptcy is appropriate – there are immediate financial costs, such as a lawyer, the bankruptcy filing fees, plus lots of opportunity costs such as lost credit, mortgage, and other financial opportunities that will be hard to secure for a couple of years after a bankruptcy goes on your record. Discuss these costs, along with alternatives to bankruptcy, with an experienced attorney before making a rash decision or before continuing to suffer the harassment and embarrassment of debt collection activities.
Alternatives to Bankruptcy
At a certain point, after looking at your credit report and all that you owe, it may seem like bankruptcy is your only way out. However, there may be alternatives to bankruptcy that will do less damage to your credit and that allow you to keep more of your assets.
One option is simple negotiation. Past-due mortgages can often be redeemed by paying the due balance or through a loan modification program. Some lenders will allow you to do a short sale that wipes out whatever you owe beyond what the house sells for. Consumer debt, such as credit cards, may be worth negotiating and fighting as well. There are many requirements for lenders and third-party debt collection agencies when it comes to collecting on these debts, and if the debt is old enough, they may not even legally be able to collect. Many of these debt collectors would rather collect something – especially if they know bankruptcy is on the table — rather than write off the entire debt.
On the other hand, if you had enough money to pay off these debts and handle the constant harassment of debt collectors via negotiation and payoffs,, wouldn’t you have already done so? Most people don’t rush into a bankruptcy filing — they do it because they have no choice, even if it does damage their credit in the near term and even if they are required to liquidate some of their assets.
Tips for Timing Your Bankruptcy Filing
There are times when you may not have any choice but to file bankruptcy: when you are facing an imminent foreclosure and need to save your home, for example.
For others, bankruptcy is part of an overall debt reduction and repayment strategy, and if they know when those debts are coming due, or when income is coming in, it may make sense to postpone or push up a bankruptcy petition filing to include a major bill.
For example: bankruptcy can only address debts that are known at the time of filing. If you know that you are going to have new expenses or assessments coming down the road, such as a large bill from a homeowners association, it may make sense to wait until that bill arrives to file.
Similarly, you may need to look at your income and any plan windfalls before picking a filing date. If you make too much right now to file, but you have recently lost your job or had some other reduction in income, you may have to wait to file until you are eligible — the means test usually includes an average of your last six months’ income. Conversely, if you expect a windfall, know that the bankruptcy trustee will be watching your finances for up to six months after the bankruptcy case and may require you to turn over a sudden influx in funds.
One more tip: don’t try to outsmart the bankruptcy court. Many people will think of ideas such as “paying a debt to a loved one” and transfer a few thousand dollars to their mother or a sibling before filing. The bankruptcy court will chase that money down or require you, the filer, to cover the cost.
Is a lawyer necessary?
Technically speaking, no. It is entirely possible that you are smart enough and can research enough to handle your bankruptcy on your own. However, considering everything you have to factor in when it comes to the timing of your filing (income requirements, expected windfalls, expected expenses, etc.) and even whether you file at all (after considering alternatives to filing), the advice of a seasoned professional who deals with consumer debt and bankruptcy issues that will factor in heavily to your decision of whether and when to file is invaluable when compared to the blank forms you may find online.
Before you make the decision to file on your own, consider setting up a consultation with an experienced attorney to hear more about how their experience may help you in your particular situation.