When is the Best Time to File for Bankruptcy?
In many cases, you know you need a bankruptcy. Maybe you are being sued for credit card debt, or something else is going on that requires you get immediate relief.
But other times, you have a choice when to file, and although you need financial relief quickly, there is no emergency that requires that you file. Because there is a choice, one of the most common questions is when the best time is to file bankruptcy.
That is a complex question to answer, and will vary from person to person, but there are some basic truths that can help you determine whether it’s the right time to file or not.
Your income: For Chapter 7 bankruptcy, your income is determined by the average of your last 6 months. The question you need to ask is whether your previous 6 months of income is representative of your current income.
For example, assume you were making $100,000 a year and last week you were laid off from your job. If you file for bankruptcy now, your six month average will be based on the $100,000 salary that you no longer make. The same holds true if you make very little money, but just deposited an insurance payment, lawsuit, settlement, inheritance, or some other one-time sum of money. That one-time deposit can artificially skew the six-month income average to be higher.
Additional Debt: Let’s assume that you are in a situation that you may incur a lot of debt that you cannot pay. For example, assume that you just had a medical diagnosis which you know will lead to a lot of medical bills. Or, assume you just lost your job and you know that you may have debts mounting up because you can’t pay them.
You may want to wait to file bankruptcy in these situations. If you file for bankruptcy and get your debts discharged, the debt you incur after your discharge—in our example, the continuing medical debts, or life expenses—will not have been included in the bankruptcy. They will be valid debts. Filing for bankruptcy too early can lead to problems, as you want to include as much debt as possible.
The Amount of Debt: There is no hard and fast rule about how much you need to owe, to file for bankruptcy. Certainly, if you don’t owe a lot, there may be other ways to handle your debt.
Still, a small amount of debt to one person is a lot to another. To someone making $20,000 a year, a $10,000 debt may be more than you can deal with, and bankruptcy may be a good idea. Someone with $20,000 in debt may be able to manage that debt better than someone else who is also raising 3 kids and who has higher daily expenses.