21 Apr Timing in Bankruptcy Cases
As in lots of things, timing can be everything. Timing is important in music, comedy, athletics, you name it.
Timing can be very important in a bankruptcy case, too. There can be multiple reasons for filing bankruptcy sooner as opposed to later. There can be good reasons for delaying a bankruptcy, too. The main point of this article is that, whether you file bankruptcy now or later, it does not hurt to talk to an experienced bankruptcy attorney sooner to find out if there are any timing issues in your situation.
Why should I file now!
Apart from the typical reasons of urgency—house is being foreclosed next week; car is about to get repossessed, there are other timing issues that can be very important. Some examples include the following:
In most states, if a creditor gets a court judgment, your wages can be garnished (my state does not have wage garnishment). If your wages are garnished, it may make it harder for you to get your money together to file for bankruptcy protection. If you know a lawsuit is coming, filing sooner rather than later may be the optimum thing to do.
Another factor about court judgments is that once a judgment is entered in a county where you own real estate, it is a lien on your land. For some people, this may not be such a big deal because judgment liens can be avoided in bankruptcy under certain circumstances.
A judgment lien can be avoided to the extent that exempt property is impaired. If you have a mortgage on your land and you do not have more equity in the property than you can exempt, having a judgment entered against you may not be huge problem. But, if you are close to the maximum amount of equity that you can exempt, as you pay down your mortgage, more and more equity becomes available to that judgment lien creditor. Filing a bankruptcy case sooner as opposed to later may make sense because you may be able to avoid the judgment lien in its entirety.
Another timing factor for filing sooner as opposed to later may involve an analysis of a preference. A preference is whether a creditor obtains more property than the creditor would have gotten in a liquidation or sell-off of stuff in a bankruptcy case (see our glossary for more on this). If a creditor gets a judgment against you and you time a bankruptcy case correctly, you may be able to have the judgment set aside as a preference. This may be advantageous for you.
Why should I wait to file bankruptcy
Just as there are good reasons for filing bankruptcy sooner, there can be very good reasons for waiting to file bankruptcy.
Need to obtain money for bankruptcy fees
Bankruptcy is a complicated legal proceeding and it takes money to file bankruptcy. It takes money to pay for a quality bankruptcy lawyer, too. Most lawyers will want their fees up front particularly for a chapter 7 case.
Potential cram-down on a vehicle
In our glossary, we discuss what a “cram-down” is for a chapter 13 case. If you have a car that you bought and you are making payments on it but have not quite had it for 2 1/2 years, it may make sense to wait until after the 2 1/2 year mark so that you can cram-down the car. By cramming down the car, you may pay significantly less for the car through a chapter 13 case than if you do not.
A preference may justify filing bankruptcy sooner as opposed to later. It can just as easily justify delaying a filing so that the time period for recovering a preference expires. If you have made a payment to a creditor that you do not want “clawed back” by the trustee, waiting a few more months may make sense. Or, if you have made a transfer of property to someone, it may make sense to wait a while so that the applicable time period expires.
If you have filed all your tax returns, some taxes can be discharged if they are of a certain age. The requirements for determining the dischargeability of taxes can be daunting but it can be accomplished. If you owe state or federal taxes, it may be to your benefit to delay a bankruptcy filing so that the necessary time period passes. This can mean the difference in discharging potentially thousands of dollars in taxes or getting stuck with continuing to pay these claims.
Second mortgage strip-offs
Typically, a mortgage on your house cannot be modified in bankruptcy. You either pay it or risk the creditor foreclosing (at some point). But, if you do not have much equity in your home for the second mortgage to attach, you potentially could delay a filing and delay payments on the first mortgage so that as the first mortgage debt rises, it eats up the equity that the second mortgage can attach to. This could mean that, in a chapter 13 case, you could strip off completely your second mortgage and treat it as a unsecured debts.
As I said above, timing can be important. This is not an exclusive list of timing issues but only as an example. If you feel the financial ropes tightening, it does not hurt to talk to an experienced bankruptcy attorney now to find out if you may have timing issues with your case which could be important. Your financial future could depend on it.