When to Consider Delaying Your Bankruptcy
Consumer debt is approaching all-time highs. For better and for worse, bankruptcy no longer carries the same stigma it once did. A well-considered filing offers many potential advantages, including but not limited to:
- A chance to clear your debt
- An automatic stay on wage garnishment and debt collection
- An opportunity to repair and rebuild your credit
However, bankruptcy petitions can be risk-filled undertakings, especially if:
You Can Modify Your Mortgage
Filing for Chapter 7 or Chapter 13 bankruptcy could delay a foreclosure—sometimes for months, and sometimes permanently. However, a premature filing could complicate homeowners’ ability to obtain a mortgage modification.
Since bankruptcy could cancel your home’s promissory note—but not its lien—lenders may outright refuse to renegotiate its terms.
So, if you are hoping that bankruptcy could facilitate a mortgage modification, you should probably delay your decision until you have had the chance to speak to a bankruptcy professional.
Your Have Property You Want to Keep
If you file for Chapter 7 bankruptcy, you may be forced to forfeit certain properties during or after proceedings. For example:
- Tax refunds. Depending on your personal financial circumstances, the bankruptcy trustee may ask that you eventually surrender your tax refund. However, by delaying your bankruptcy filing, you would have an opportunity to gradually expend your refund over the course of weeks or months.
- Properties above the exemption minimum. New York law only permits persons filing for Chapter 7 bankruptcy to protect assets up to a certain value. For example, the Empire State will only allow petitioners to exempt motor vehicles worth up to $3,775. While this figure is relatively low, waiting could pay significant dividends if you own a depreciating asset—such as a car—that is just above the exemption threshold.
- Nonexempt assets. Nonexempt assets can be appropriated by the bankruptcy trustee and sold to pay your creditors. Before filing for bankruptcy, you could sell your assets at their fair market value, using the proceeds to pay rent or purchase other necessities. However, you should always consult an attorney before trying to sell nonexempt assets, since any sizeable sales could raise red flags in court.
Your Recent Income Has Increased
When the court considers a Chapter 7 bankruptcy petition, it will review your income for the past six months using a special “means test.” For 2021, the qualifying monthly income limits were:
- $5,058 for a single individual
- $6,429.92 for a family of two
- $7,709 for a family of three
- $9,368.67 for a family of four
- $10,118.67 for a family of five
So, if your recent income has been higher than usual, you may not be eligible to file for Chapter 7 bankruptcy.
However, if your recent income is on a downward trajectory, waiting for your median income to fall beneath the “means test” limits could increase your chances of a successful filing.
You Have Given Away Valuable Assets
When you file for bankruptcy, the trustee will look over your recent financial activities. In some cases, the trustee might investigate transfers within the past two years. The trustee will look into transactions such as:
- “Preferential payments” of $600 or more to friends and family
- Payments to creditors who are neither friends nor family members
- Property transfers
Making a so-called “preferential payment” will not bar you from filing a bankruptcy petition. However, the trustee may order that the assets be recovered and used to pay your creditors.