Timing Is Important. When Should You File?

Some people need to file for bankruptcy immediately ‑ as in today. Their immediate situation is intolerable if they do not declare bankruptcy immediately. An example this might be in the case of wage garnishment. These wage earners often must get a bankruptcy removal of the wage garnishment in order to survive. (I can do this type of emergency bankruptcy filing in a matter of an hour or so, from my desk, over the internet.)

Other debtors may not be in an emergency bankruptcy situation but have finally realized that they are never going to be able to pay off their mountain of debt. These debtors are hoping for an improvement in their financial situation but need a fresh start. These debtors can file now or wait. For them, there is often no rush.

Some people should wait because they do not pass one of the income ceiling tests now but they expect to be able to pass it in a few months.

One of the 2 income ceiling tests is The Means Test.  (The other is the Current Income test.) The means test looks at your income for the previous 6 months. Let’s say you were making $7000 per month at your job but you were laid off 2 months ago.  Your average income for the last 6 months would be $4666.  If the median income for a household like yours is $4100 then you would be over the median and might have trouble with the means test.  If you were to wait another month then your average income for the preceding 6 months would be $3500.  That would be under the median and you would pass the means test.

Some people should file now because their income will be increasing in the future.  They pass the means test now but will no longer pass the means test if they wait a few months.  For example, let’s say you’ve been making $3800 per month for the last year.  That’s under the median.  You’d pass the means test if you were to file now.  But let’s say you get a job that pays $7000 per month and you wait 2 months to file. Your average income for the preceding 6 months would be $4866.  If you’re a household of 1, you’d be over the median and you’d have trouble with the means test.

Another reason you might want to file immediately is that you may have trouble passing the Current Income Test (sometimes referred to as the I & J test) in the future but you can pass it now.  The Current Income Test looks at your predicted, after-filing income and compares it to your predicted after-filing expenses.  If the schedules show that it is predicted that you will have a budget surplus every month then the court will not allow you to file a Chapter 7.  You instead will be given the option to dismiss your case or to convert your case to a Chapter 13.  The thinking behind this law is that if you will be having a budget surplus then your should be filing a Chapter 13 and you should dedicate that surplus to the Chapter 13 plan.

An example of the previous paragraph would be a client that has been making say $3500 per month.  He has not been making payments on his unsecured debts (credit cards, etc).  His expenses are generally running around $4500 per month.  If he were to file now he would pass the Current Income Test because he will be having an after-filing monthly budget deficit.  But what if he is expecting to get a job where he will be earning $5000 per month?  If he knows he is getting this job when he files his bankruptcy and when he attends the hearing then he must disclose the expected $5000 per month income.  If his monthly expenses are expected to remain $4500 then he will flunk the Current Income Test.  He will be stuck filing a Chapter 13.

If you have more equity in your home than the exemptions allow you would have a problem filing for bankruptcy. Your equity may be low now, giving you a window of opportunity. But if property values increase it may no longer wise to file bankruptcy because it may no longer be protected by the exemptions. You might lose your home.

In September 2020 California greatly increased the homestead exemption. It could be as high as $600,000 depending on your situation. But if you file your case to soon you may not be able to take advantage of the full exemption. This is because there is a cap on the amount of homestead exemption you can take. But the cap only applies if you acquired the property during the 1,215-day period (3 years, 4 months) before filing the bankruptcy petition. At the present time, the cap is $135,750.00. §522(p)

The fact that you made certain purchases recently may dictate the need to wait before your file.

If you purchased something on credit after you knew you were filing for bankruptcy then you could be accused of obtaining goods or services by false pretenses. Expenses for medical bills or other necessities have rarely been found to be a violation of this rule. However, a vacation or shopping spree on credit cards could be found to be fraud.

There is a rebuttable presumption that consumer debts totaling more than $500 owed to a single creditor for “luxury goods and services” obtained within 90 days before filing or cash advances more than $750 obtained within 70 days before filing were fraudulently incurred.
Therefore you should probably wait to file if you used your credit cards as described above.

It can be very complicated and confusing. Even if you aren’t sure that now is the time to file there is no harm (and there may be great benefit) in speaking to a bankruptcy attorney now. You can call or e‑mail me for a free consultation.

Sometimes a client will have a bankruptcy in the past and is interested in filing again. You must wait 8 years to file chapter 7 after getting a discharge in a previous chapter 7. You must wait 4 years to file a chapter 13 in order to get a discharge in the chapter 13 case.
If you are thinking that bankruptcy, or at least getting a free consultation with a San Diego bankruptcy lawyer, might be a good idea don’t wait to speak to us. Call now for a free consultation with a bankruptcy attorney. We will tell you if now is the time to file or if it would be better to wait.

If you want to discharge taxes you may need to wait.

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