If you're planning to file for bankruptcy, it might make sense to do so as soon as possible. For instance, filing for bankruptcy can stop a foreclosure, repossession, or wage garnishment while helping you keep property and erase or "discharge" qualifying debt. Below are the seven reasons people benefit from filing for bankruptcy sooner rather than later.
Keep in mind that it's common to have competing reasons to file soon and reasons to wait. So, it's important to consult a knowledgeable bankruptcy lawyer before proceeding with Chapter 7 or 13.
If you're in foreclosure, you can stop it by filing for bankruptcy. Once filed, the automatic stay prohibits lenders and creditors from continuing collection actions against you, including foreclosure proceedings. However, remember that Chapter 7 doesn't have a mechanism to help you stay in your home, and the lender can file a motion to lift the stay. The relief will be temporary. Only in Chapter 13 can you catch up on mortgage payments and keep your house.
One of Chapter 7's benefits is that if you file before the foreclosure ends, the bankruptcy will wipe out the entire mortgage debt. You won't get stuck owing the difference between the auction price and your balance, which is called a "deficiency." Because even if your lender forgives the deficiency after foreclosure, you'll likely owe income taxes on the forgiven amount. Filing for bankruptcy before the foreclosure can help avoid these problems. Find out more in Should I File for Bankruptcy Before or After Foreclosure?
Bankruptcy's automatic stay also puts an immediate stop to any efforts by your lender to repossess your car. In Chapter 13, you can catch up by including back payments in your plan. In both chapters, you might be able to get your vehicle back if the lender repossessed it recently. Talk to a local bankruptcy lawyer. If you'd like to learn more, read Can the Lender Repossess My Car During Chapter 7 Bankruptcy and Car Repossession and Chapter 13 Bankruptcy.
You don't have to give up all of your property in bankruptcy. Each state has a list of bankruptcy exemptions that you can use to keep the property you'll need to work and live. If you've moved to a different state, and the new exemption laws won't protect you as much as those in the old state, you'll want to file for bankruptcy soon. The available state exemptions will depend on your "domicile." In most cases, you'll use your old state's exemptions when you've moved recently.
A bankruptcy filing will stop most evictions, but not for long. Also, if the landlord already obtained a judgment for possession (an eviction order from the court), bankruptcy won't help at all. Learn more about bankruptcy and evictions.
If someone is suing you for medical debt, credit card debt, car accident damages, or a breach of contract, filing for bankruptcy will stop the suit. It makes no sense to pay to defend these lawsuits if you can have the debt discharged. However, bankruptcy will not stop all lawsuits. For instance, criminal and family custody and support actions will continue.
Qualifying for Chapter 7 bankruptcy means passing the means test. Your income is essential—the means test looks at your average earnings over the six months before you file. The higher your income, the less likely you'll pass the means test. If you recently started a higher-paying job, your means test average income increases every month you wait to file. Filing for bankruptcy sooner rather than later may help you pass the means test. However, that's not all that the trustee and court will consider. If your actual income is higher than what you need to cover monthly expenses, the trustee will recommend converting your case to Chapter 13.
You can usually keep property in which you obtain an ownership interest after filing for bankruptcy. However, exceptions exist. For instance, you'll need to report inheritances and lottery winnings up to 180 days after you file. So, if you expect to receive property soon, it might be a good idea to file before you become entitled to it—but speak with a local bankruptcy lawyer first.