Tough economic times make us think about escape by filing bankruptcy. Bankruptcy offers a straight forward, predictable and immediate solution.
But to get full measure of bankruptcy relief, you need to know which problems bankruptcy solves and when the time is best to file.
Which problems bankruptcy solves
Bankruptcy deals with debt, with the outflow side of the financial equation. It provides little help if the more fundamental problem is insufficient income.
Bankruptcy’s greatest impact is to reduce the number of creditors holding old claims against you who get a piece of today’s income.
Bankruptcy’s other “superpower” is the automatic stay. It brings to a halt almost all collection actions. It stops foreclosures, levies, garnishments, and even collection calls.
And upon entry of the bankruptcy discharge, those collection actions are permanently stopped. The exception is possibly debts where the creditor has a lien you gave the creditor, like mortgages and car loans.
Timing bankruptcy is everything
The most frequent mistakes made in filing bankruptcy revolve around the timing of the filing. File too soon, or too late, and you lose advantages to maximize the benefits of bankruptcy.
File too soon
Instances of filing too soon include filing too close in time to a prior bankruptcy case that was dismissed. Filing right after a previous case was tossed out of bankruptcy court may limit or even preclude a stay in the new case. More.
The ability to discharge taxes is tied to the age of the tax debt and when the return was filed. Just a few days too soon and the tax survives the bankruptcy.
Your eligibility for a discharge in a new case is dependent on how long ago you got an earlier bankruptcy discharge and what chapter each case is filed under. While you can always file a case, whether you get a discharge in that case depends on timing.
If you’ve moved from state to state in the past three years, your choices for which state’s exemption system you can use turns on where you lived two years ago. Once you know which set of exemptions is better, you can time your filing to your advantage.
Filing too late
Filing bankruptcy after a foreclosure or eviction judgment provides no relief to the person filing. Bankruptcy protects what you own or have legal rights to on the day you file.
After foreclosure or eviction, you have nothing to protect other perhaps that the naked right to possession, which won’t last long.
Wait until after your wages or bank account have been garnished and you may have lost money that could have been protected in a case filed earlier. While the law allows you to recover money taken by legal process that would have been exempt, that process is expensive and time consuming.
Liquidating retirement assets to pay unsecured debts is another painful example to waiting too long to choose bankruptcy. Retirement assets are almost always 100% exempt, protected from your creditors. Using that hard-won money for your old age on today’s debts is usually unnecessary and ill advised.
Get professional help with timing
Most people’s circumstances include some of the “file now” elements AND some “wait awhile” ones. The stress of being in debt makes it harder to think through the various scenarios.
Enlist a bankruptcy lawyer to assess your situation and to help you measure the urgency of your problems. Even within the world of lawyers, bankruptcy is a specialty; there’s no reason to think that you ought to be able to work it out on your own.
When the time is right, bankruptcy relief is available.