When Does It Make Sense to Delay Filing for Bankruptcy

Learn when it might be best to wait before filing for bankruptcy.

Timing your bankruptcy filing correctly can allow you to get the most benefit out of your case. In certain situations, it’s advantageous to file for bankruptcy immediately (see why here). But sometimes it may be in your best interest to delay your filing. Read on to learn more about when it makes sense to postpone filing for bankruptcy.

Below are some reasons when waiting to file for bankruptcy might be a good idea.

You Can Keep More Property By Using Your New State’s Exemptions

Each state has its own set of bankruptcy exemptions that determine how much property you can keep in Chapter 7 bankruptcy. To prevent debtors from temporarily moving to a state with more generous exemptions just to file for bankruptcy, Congress created certain rules debtors must satisfy before they are eligible to use a state’s exemption system.

In general, you must be domiciled in a state (made it your permanent home) for at least two years before you can use its bankruptcy exemptions. This means that if you recently moved, you may have to delay your bankruptcy filing if you want to take advantage of your new state’s exemptions.

You Just Lost Your Job or Received a Pay Cut

To qualify for Chapter 7 bankruptcy you must pass the bankruptcy means test. The means test compares your average income for the six months before your bankruptcy filing with the median income in your state for a similar size household. If your income is below the state median, you pass the test automatically. Because of this, if you recently lost your job or received a pay cut, waiting to file your case until your six-month average income has dropped below the state median can make it easier for you to qualify for Chapter 7 bankruptcy.

You Wish to Cram Down Your Car Loan

In Chapter 13 bankruptcy, you may be able to reduce your interest rate and car loan balance through a process called a cramdown. But to qualify for a car loan cramdown, you must have purchased your car at least 910 days prior to your bankruptcy filing. If you haven’t owned your car for at least 910 days, you must wait to file your case if you want to cram down your loan.

You Want to Discharge Income Tax Debts

Income tax obligations are typically treated as nondischargeable priority debts in bankruptcy. But you may be able to wipe out your older income tax debts if you satisfy certain requirements. In general, you can only discharge income tax debts for which a tax return was due at least three years before your bankruptcy filing date (taking into account any extensions you received). But keep in mind that there are other conditions you must satisfy as well. If you have recent income tax obligations, you may need to delay your bankruptcy if you want to eliminate them.

You Are About to Receive a Tax Refund

Your tax refund (whether you have already received it or not) is property of your bankruptcy estate. If you can’t exempt your expected tax refund in Chapter 7 bankruptcy, your bankruptcy trustee can take it and distribute it to your creditors. As a result, it may be in your best interest to wait to file your case until you receive your refund and spend it (it is usually best to use your refund on necessities for you and your family such as rent, food, and gas).

You Just Paid Back a Loan from Your Family

Bankruptcy law doesn’t allow you to prefer one creditor over another. Most debtors would rather pay back their family rather than a credit card company. But if you pay off a loan from your family prior to filing for bankruptcy, the trustee may be able to get the money back to distribute among all of your creditors. In general, the trustee can "avoid" (get back) payments made to any creditor in the 90 days preceding your bankruptcy or to insiders (such as business partners and family members) within one year of your filing date.

You Incurred New Charges on Your Credit Card

In bankruptcy, you can’t discharge any debts obtained through fraud. In general, it’s difficult for creditors to prove fraud in bankruptcy court. But if you bought luxury items with your credit card in the 90 days before your bankruptcy or obtained cash advances within 70 days of your filing date, those charges may be presumed to be nondischargeable, which means the creditor doesn't have to prove fraud (although you would get a chance to prove they were not obtained through fraud). In that case, it may be a good idea to delay your bankruptcy until the presumption period has passed.

For more information, see Can I use my credit cards prior to filing for bankruptcy?

You Recently Gave Away or Transferred Some of Your Property

Bankruptcy trustees have the power to avoid (cancel) certain property transfers made by debtors prior to bankruptcy and get the asset back for the benefit of all creditors. This is typically referred to as a bankruptcy clawback. In general, whether a trustee can claw back property depends on when it was transferred, how much the debtor received, and whether there was fraud involved. If you recently transferred property out of your name, postponing your bankruptcy may help you avoid a bankruptcy clawback.

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