Bankruptcy: Is Time on Your Side?

Before filing bankruptcy, make sure that you discuss the timing of your filing with your attorney. The time of year, or even the time of month, can significantly impact your bankruptcy case. This article will discuss three instances when the choice of when the case is filed has a great impact on the debtor’s bankruptcy success.

Tax Refunds

The debtor’s entitlement to a large tax refund can affect her bankruptcy case. In a Chapter 7, the debtor can use any available exemptions to protect an anticipated tax refund. Any non-exempt portion of the refund is subject to turnover to the trustee for distribution to creditors. In a Chapter 13 case, the debtor must account for the non-exempt portion of the tax refund and pay creditors a sum equal to that amount. In most cases it is wise to wait to file the bankruptcy case until after the income tax refund has been received and spent in a responsible manner. Filing prematurely can cause the debtor to lose all or a portion of her tax refund.

Means Test

The bankruptcy means test averages the debtor’s income for the six months prior to the filing date, and uses that figure as a presumed projected income for the future. In some cases filing even a day “late” can greatly complicate a bankruptcy case. For example, suppose the debtor files on November 30. The means test calculation requires the debtor to average the past six months of income, or May through October (not November). Suppose that the debtor received a large bonus from work in May. That bonus will artificially inflate the debtor’s average income. By waiting until December 1 to file, the month of May is no longer considered in the six month average and the bonus check is moot. Correctly timing your bankruptcy filing can save you time, trouble, and money.

Recent Credit Purchases

Luxury credit card purchases of $500 or more and made within 90 days of filing bankruptcy are presumptively non-dischargeable. Additionally, cash advances of over $750 within 70 days before filing are presumably non-dischargeable. There are defenses to the presumption against discharge, however the best defense is a good offense: wait until the look-back period has expired before filing your case. Without the presumption against discharge on its side, the bank must show that a recent credit card purchase was made with no intention to pay. That is a much tougher case to make, and one that most banks will not pursue so long as the amount at issue is relatively low.

If you are considering bankruptcy, discuss your timing options with your attorney. Bankruptcy attorneys are very good at identifying and avoiding potential trouble areas in your case, but a frank discussion between attorney and client will help flesh out issues in your case.