If you’re struggling with debt beyond what you can afford, bankruptcy may be the tool you need to correct your financial situation. Deciding that bankruptcy is right for you is a major decision, but choosing the right time to file can be just as important as deciding to file in the first place.
Bankruptcy is a complex process that affects different debts in unique ways, often depending on your specific financial situation. Below you can learn about how aspects of your situation may impact when you should file.
To learn more about how bankruptcy can help you, we recommend contacting a dedicated Brownsville bankruptcy attorney at the Law Offices of Phillippe and Associates.
Reasons to File Bankruptcy Now
Financial decisions are usually emotionally fraught, a fact that isn’t helped by the short timelines often involved with filing for bankruptcy. Still, you may be in a financial position which makes filing immediately your best option.
The following scenarios may make filing bankruptcy right away your best bet.
1. Bankruptcy Halts Collection Efforts
One of the biggest benefits of filing for bankruptcy is something known as an automatic stay. An automatic stay is placed on your debts when you file, meaning that creditors can no longer attempt to recover on your debts.
Any wage garnishments must be halted and your creditors must stop calling or mailing you collection requests. Foreclosures are stalled and any attempts to seize your bank account or other property must halt. Filing bankruptcy may also stall eviction efforts, repossessions, debt lawsuits, and other forms of collection enforcement.
2. Your Debts Are Growing
The most obvious reason to file right away is that the longer you wait, the more debt you are likely to accumulate. Many people struggle for years before finally deciding to file, but in the meantime, their assets deplete and their debts grow. You may also face lawsuits regarding your debt, significant financial shortfalls, and other issues that could potentially be avoided by filing.
According to a study completed by the Consumer Bankruptcy Project, two-thirds of all debtors who file for bankruptcy are in a dire financial situation for two years before they finally choose to file. Unfortunately, the study showed that these individuals had half the assets and nearly twice the debts as those who didn’t choose to wait.
People who wait two or more years are also significantly more likely to face debt-collection lawsuits.
3. Your Debts Are at 40% of Your Income Level
Your debt-to-income ratio is a good metric for determining when filing for bankruptcy might be right for you. This measurement compares your debts to the amount of money you’re making in order to get a picture of your financial distress.
According to the Federal Reserve, debtors with a debt-to-income ratio of 40% or more should seriously consider bankruptcy. At this point, it is unlikely that you will be able to pay off your debt on your own, according to the Reserve.
4. You’re Adding Debt to Pay Other Debts
Signing up for credit cards often seems like no big deal, but, unfortunately, our debts can quickly spiral out of control if we don’t take care. One of the most slippery slopes debtors find themselves on is taking out new debts in order to pay off old ones.
For instance, some individuals may take out a new credit card to pay off an old one rather than addressing the actual debt. At this point, a serious influx of cash or bankruptcy would likely be needed for the debtor to be able to reach financial freedom.
5. You Can’t Afford Necessities
If your debts have reached such a level that you can no longer afford all of the essentials you need to live, it may be time to file. Two-thirds of all debtors who struggle for two years or more before filing forgo seeking medical attention due to their debt. Nearly a third find themselves unable to afford food.
6. Your Debts Could Be Dischargeable
One reason to file right away is simply that your debts may be dischargeable. If you primarily have unsecured debt, it’s likely that all of that debt would be discharged if your filing is successful.
Unsecured debts include personal loans, medical bills, and credit cards.
Reasons to Delay Filing Bankruptcy
As we’ve previously shown, there are many reasons to file bankruptcy immediately, but there are also reasons to consider waiting to file.
1. You’re Expecting an Influx of Money
If you’re expecting an inheritance or some other kind of windfall, you may want to wait to file for bankruptcy until after you’ve spent that money. After you file, any non-exempt assets you have will go towards paying off your debts, and exempting large amounts of cash is unlikely.
Rather than filing for bankruptcy right away after a windfall, you may wish to take the time to spend that money on your necessities.
2. You Recently Bought Luxury Goods
If you’ve spent a significant amount of money on luxury goods, you may wish to wait 90 days before filing for bankruptcy. The court may determine that you have to pay off these debts despite your bankruptcy.
This is also true if you have recently received a significant cash advance. If you received a large cash advance for non-essential purchases, you may wish to wait 70 days before filing.
3. New Debts May Be Coming
Generally, bankruptcy impacts the debts that you have at the time of filing. As such, if you expect to have to take on more debt in the coming months, you may wish to wait so that you can include that additional debt in your filing.
If you wait, it’s possible that your new debt could be completely discharged.
4. You Recently Paid Off Significant Debt
Your bankruptcy filing could get complicated if you recently paid more than $600 to a single creditor. This practice is referred to as “preferring” and could lead to your bankruptcy trustee requesting your creditor return the money.
If the payment was made to a regular creditor, you may wish to wait for the 90 day preference period to end before filing. If the payment was made to a relative, the wait is one year.
5. You Recently Transferred Property or Money
There are several different financial decisions that could reflect negatively on your bankruptcy filing. One such action is called a fraudulent transfer. A fraudulent transfer involves giving away money or properties within two years of filing bankruptcy, even if you didn’t plan to file bankruptcy at the time.
If you’ve recently given away significant assets, you may wish to wait two years before filing.
6. You May Be Able to Adjust Your Mortgage
Stalling foreclosure is becoming an increasingly common reason that debtors in the U.S. file for bankruptcy. However, it’s important not to make this decision too quickly.
It’s possible that your bank may be willing to work with you to adjust your mortgage. However, once you’ve filed for bankruptcy, your lenders may refuse to negotiate. Technically, your bankruptcy would cancel the promissory note of your mortgage removing anything to negotiate over.
7. You Expect Your Income to Decrease
In order to file bankruptcy, you will need to take a means test. This test determines whether you can file Chapter 7 or Chapter 13 bankruptcy, and the course of your Chapter 13 bankruptcy if that’s the chapter for which you qualify.
The means test is based on your income levels, and you may get more favorable results if your income level is lower. Conversely, if you’ve recently been making more money, you may wish to wait for your average income to go back down before filing.
The Law Offices of Phillippe and Associates: Your Brownsville Bankruptcy Attorneys
Filing for bankruptcy is complicated, and it may not be the right choice for every individual. While putting off filing can result in added strain and debt, filing too soon can result in a less impactful bankruptcy proceeding.
To learn more about whether or not the time is right for you to file bankruptcy, reach out to our team of compassionate Brownsville bankruptcy attorneys today.