In this third installment of Bankruptcy Facts in Five, we will discuss the importance of properly planning your bankruptcy. While I recognize that sometimes the decision about the timing of a bankruptcy filing is not completely in the hands of the debtor, oftentimes, there are strategic reasons to either accelerate or delay the filing of a bankruptcy petition.
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The first reason to consider is a bankruptcy concept known as “Preferences”. Basically, the law of bankruptcy was created with two underlying concepts. First, that similar creditors should be treated equally. That means that one creditor should not get more money in a bankruptcy than another. Secondly, that the debtor should not be able to “harbor” money by sending it to family members, friends and business associates. The bankruptcy code refers to this group together as “insiders”.
So the bankruptcy law allows a Trustee to recover the money that is paid right before bankruptcy to a creditor or any insider. The Trustee has the power to request, and if necessary, to bring suit against those parties for payment of that money into the bankruptcy estate. Note that many times these payments are completely innocent. It doesn’t matter.
The bankruptcy code has a bright-line test regarding these preferential payments, or preferences, as they’re called in bankruptcy. A preference payment made within 90 days of the filing of bankruptcy to a creditor, or a payment to an insider within 12 months of filing, can be recovered by the Trustee. Now, obviously if you gave your grandchildren $1000 each last Christmas, it can be beneficial to wait until after this year’s Christmas to file for bankruptcy in order to avoid creating a situation where the Trustee will ask your grandkids for their gift back. How embarrassing!
A second area where timing becomes important is with regard to certain income tax debt. The law regarding the dischargeability of tax debt is rather complicated, but here is the very basic rule. You can wipe out income tax debt that is at least three years past the original due date. This means that it may make sense to wait an additional period of time, say an extra couple months, if doing so will allow you to eliminate an additional year of old tax debt. This area is complicated and really does require an attorney. We’ll talk more about dischargeability of tax debt in a future Bankruptcy Facts in Five.
Another area where it makes sense to assess the proper filing date is for those who have previously filed for bankruptcy. Now, depending on which chapter you first filed for bankruptcy, and depending on which chapter you are now filing under, you may have to wait two, four, six or eight years. The “start” date for the calculation may be the original filing date, or it may be your discharge date, depending on the circumstances. If you file again, you cannot receive a discharge of your debt in the new bankruptcy. Obviously this is most of the reason for filing in the first place!
If you had a previous case dismissed, you also have a waiting period, but this time period is to ensure the applicability of the automatic stay which prevents your creditors from coming after you while in bankruptcy.
But sometimes there is a good reason to file sooner, rather than later. The most obvious reason is to implement the automatic stay as soon as possible. If you have a possible judgment action, like a wage garnishment or a levy on your bank accounts, the automatic stay is only applicable after you’ve filed for bankruptcy protection. The necessity for quick timing is especially important when facing a situation like foreclosure.
Also, if you are ending a period of unemployment, and your new job pays more than the median wage, then your opportunity to file under Chapter 7 may require prompt action. Otherwise you’ll be limited to a Chapter 13 repayment plan.
In any case, it is important for you to talk to a lawyer as soon as possible. By understanding that the timing of your decision to file for bankruptcy has a real impact on the ultimate disposition of your case, you will avoid being forced into making a hasty decision that may cost you a great deal of money and may prevent you from filing for bankruptcy at all.