Best Time to File Bankruptcy

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While there is never a good time to file bankruptcy, there are some things that make filing bankruptcy at a certain time more or less advantageous for the filer. Making sure you understand the various bankruptcy rules and timing a bankruptcy filing correctly can save you some time and money.

Good Time to File Bankruptcy

One of the things that trips many bankruptcy filers up, even after speaking with a bankruptcy attorney, is that the bankruptcy court will take 40 percent of your unpaid earnings. If you get paid once per month, this can be a very big deal. For example, if you get paid on the 30th of each month and you file your bankruptcy petition with the court on the 28th, you will have to pay almost half the amount of your pay check to the bankruptcy trustee. In a case like this, you would be much better off waiting the following month to file for bankruptcy.

However, there is a catch. You don’t want to file too soon after being paid because the other thing that the bankruptcy court is entitled to is almost all of the cash in your bank accounts on the day you file. For example, if you got paid $3,000 on the 30th and then you filed your bankruptcy petition on the 1st and there was $2,900 left in your bank account, you’ll have to pay that $2,900 to the trustee, even if you have long since spent it since you filed. Don’t forget, the numbers that matter are the ones that exist on the day you file.

Which brings us to the next issue in bankruptcy filing timing. Spend your money before you file. Be careful HOW you spend your money. Buying “things” like jewelry or other items is a very bad idea. The court can ask you to forfeit those items, especially if you bought them close to the filing date or if those items exceed the amount of allowable bankruptcy exemptions in your state. However, buying groceries, filling prescriptions and making sure your gas tank is full are very good ways to spend your money down before filing bankruptcy. No one can complain that you want to eat and stay healthy. More to the point, there is really no way to ask you to forfeit food, gas, and medicines.

Be very sure you understand that the amount in your account on the day you file is what matters, not when you spent the money. For example, if you write a check for $200 worth of groceries on the 8th, file bankruptcy on the 9th and the check clears on the 10th, the amount of money that counts against you for the purposes of asset counting in your bankruptcy is the amount in your checking account on the 9th, which includes the $250 you already spent. For this reason, it can be useful to withdraw cash. However, large cash withdrawals right before filing can be suspicious. Keep all your receipts to prove that you spent that money on necessities. You can also use your checking account debit card instead. Debit card transactions often clear in 24 hours, so you just have to wait one day. However, be careful of weekends and bank holidays when transactions may be delayed in reporting. You can also simply time your filing for a time after your checks and debit card transactions have cleared.

If you file anytime between December and April, don’t be surprised if your bankruptcy trustee keeps your case open long enough to take any tax refund you are getting. Don’t try spending your refund right before filing either, that usually won’t fly. Either adjust your withholding to avoid a refund (late in the year). If you still owe taxes from the previous year, this doesn’t apply to you. The IRS will intercept any refund before it ever goes to you and apply it to your outstanding taxes, before the court can lay any claim to it. This works in your favor since most federal income taxes cannot be discharged in bankruptcy.

Pay Bills Before Bankruptcy

It doesn’t make sense to pay bills due on credit cards before filing. Those debts, including any late fees, will be wiped out in the discharge. As far as your credit score goes, bankruptcy is bankruptcy. Your credit report won’t look any better if you have slightly lower balances on your credit cards before you file. You might want to take a look at your credit score before you file. To avoid having to pay, get a free credit score from CreditKarma.com. (See my Credit Karma scam article and my CreditKarma.com review article for more details.) You may, however, want to wait to sign up for Credit Karma free credit monitoring. You’ll just get a lot of depressing emails as everyone reports your bankruptcy and charge offs.

While it is not smart to pay bills like credit card bills, it is very smart to pay utilities and other bills. Paying those bills takes money out of your accounts in a way that cannot be reclaimed by the bankruptcy courts. So, in our example above, the best time to file for bankruptcy is soon after you get paid, but not until you have paid your electric bill, cable bill, cell phone bills, kid’s tuition or day care fees, and so on. Each of those things will reduce the amount of cash you have to report without raising any white flags. In order to keep the amount of unpaid earnings you have to pay to the court low, pay those bills in advance so that you can file soon after you get your paycheck before more unpaid earnings build up.

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