Plan before filing bankruptcy and you get better, more certain relief.
Even if you’re not quite sure that you’re ready to take the bankruptcy plunge, scout the bankruptcy territory. Take some time to learn the rules and explore ways to maximize the relief available in bankruptcy.
If you don’t plan ahead and just rush into a bankruptcy lawyer’s office at the last minute, you’ll have far fewer options. Options that some planning might have offered.
Here’s a checklist to help you plan before you file bankruptcy. None of these commit you to filing.
Know your household income
The means test controls whether you have unfetter choice of bankruptcy chapters. It looks at all forms of gross income (not take home pay) and regular contributions from anyone to your family’s living expenses.
Gather up paystubs, commission checks, stock dividends, child support and side gigs and see where you fall on your state’s median income ladder.
File any unfiled tax returns
Your tax return tells you whether you withhold too much tax, and get a refund, or whether you are underwithheld, and owe taxes. Unpaid taxes are a deduction on the means test, so hold off paying any tax you owe til you’ve talked with a bankruptcy lawyer. That tax debt may be useful in passing the means test if you are above median income.
If you operate a business, tax returns provide essential information about business expenses, again useful for budgeting and the means test.
Segregate exempt income
Not all forms of income are counted in the means test. Social Security is exempt from claims of creditors and excluded from the means test in every state.
In California, retirement income is also fully exempt. By keeping it separate from wages or other income, you may be able to exempt any unspent retirement income and keep it through the bankruptcy.
Set aside funds for attorneys fees
If you end up needing to file bankruptcy, you need a lawyer. Bankruptcy was made (needlessly) more complicated and more stuffed with negative consequences by bankruptcy “reform”. This is no longer something that is safely done on your own.
Save up before filing bankruptcy, so you aren’t limited to the cheapest lawyer in town. See what should bankruptcy cost.
Don’t pay off debts without advice
Trying to tidy up your finances before filing runs two different kinds of risk. One is that you set up the recipient of the payments to being sued by the bankruptcy trustee to recover a preference. The other is that you waste money paying down a debt that will go away in bankruptcy.
And then there’s the means test. Some debts are useful deductions on the means test, allowing you a passing grade. Don’t eliminate possible advantages of some kinds of debt before you understand how the means test works.
Consider replacing an aging vehicle
Bankruptcy usually makes the short term cost of credit increase. If you anticipate needing replacement wheels, it may be cheaper to buy a new car before filing bankruptcy than after.
I have been consistently amazed at the deals that prospective clients who are on the eve of filing have been able to negotiate. Loan terms are important, because you can’t discharge the car loan and keep the car in bankruptcy.
The means test plays a role here, too. Payments on a secured vehicle loan are means test deductions. Two bits of advice: be absolutely honest on any loan application, and don’t buy more car than you need.
Think about your financial future
Before you file bankruptcy, you want to have an idea of what you want your financial life to look like, on the other side.
Do you want to
- keep the house
- continue the business
- surrender timeshares or vacation property
- move from where you live
- change careers
Your longer term goals will shape the choice of chapter and the choices you can make in bankruptcy. The more clearly you can articulate your goals, the better a good bankruptcy attorney can help you achieve those goals.