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Bankruptcy Timing:

When to File

Advice from Our Galveston County Bankruptcy Attorney

Filing bankruptcy is most often a last resort option to handle financial difficulties. That does not mean that it is to be rushed into at the last second without consideration of timing. Since 1983, we have seen many clients come to our firm either too early or too late to accomplish the results they are seeking with a bankruptcy. Too early is much better than too late. At least being too early allows time to plan and get things done at the right time.

Here are some frequent scenarios where timing is extremely important in seeking bankruptcy relief:

  • File before the foreclosure sale: This seems like a no-brainer. Unfortunately, our Galveston County bankruptcy attorney has been contacted by many people wanting to save their home after the foreclosure sale has taken place. Getting the sale reversed is difficult and unlikely. Most of the clients in that situation lose their home. Why would someone delay until after the sale? Many people wait on the long-promised mortgage modification until it is too late. Others are simply hoping to work it out themselves and just wait too long. Foreclosure sales in Texas take place on the first Tuesday of the month between 10 AM and 4 PM. We have received many calls on Foreclosure Tuesday morning. That is a recipe for disaster.
  • File before your vehicle is repossessed: Unlike the foreclosure scenario, a repossession can be reversed by a bankruptcy filing. The problems caused by a pre-filing repossession are practical. It will take a few days for the vehicle to be returned. In addition, damage or loss of personal items form the vehicle is not uncommon.
  • File before you use your 401k and IRAs: Money in 401k and IRAs is generally protected in a bankruptcy proceeding. They are funds that can be used to give you a head start in recovering financial stability. Unfortunately, we see many clients who access these funds to pay debts that would be dischargeable in bankruptcy. In many cases, the debts are not completely cleared or only monthly payments are made. When the retirement funds are gone, the clients have still had to file bankruptcy to finish the job of clearing the debts. They gained nothing for the loss of those protected retirement funds.
  • File before a trial is finished and a Judgment is granted: Before a Judgment is granted, your debt to the suing creditor can be uncertain. In a bankruptcy proceeding, that uncertainty can give you more options in dealing with that debt. For instance, we have had many people come to us with Judgments that had findings indicating fraud as a reason for the debt. Once there is that finding, it is very difficult to fight it in bankruptcy. The Bankruptcy Court defers to the Court that issued the Judgment. Debts obtained by fraud are not dischargeable in a bankruptcy. If the fraud Judgment is in place, there is very little you can do to effectively contest it in Bankruptcy Court.
  • File before a federal tax lien is placed on your property: A federal tax lien is filed in your county of residence. It applies to all assets you own in that county. In bankruptcy, there is a huge difference indexing with a debt with a lien and a debt without a lien. For instance, a tax debt, filed timely, over three years from the date due, and more than 240 days from the last assessment may actually be dischargeable. It can be wiped out. The filing of a tax lien can completely change that scenario and make the tax become secured by assets you own, such as your home. So, filing before the lien discharges the taxes. Filing after the lien very well may not. Even if the tax is not old enough to be discharged, the filing of a lien is important. Without a lien, such a tax must be paid in full as a priority debt, but no interest. If a lien is filed, interest must be paid.
  • File while your income numbers are favorable. Bankruptcy is now governed by threshold test called the Means Test. It is a formula using your last six months gross income to determine the amount of your disposable income. Too much disposable income and you must file a Chapter 13 reorganization instead of the Chapter 7. Your payment under the reorganization would be greatly determined by those calculations. If you have suffered a recent bout of unemployment, or are currently unemployed, it may be the best time to seek bankruptcy counsel. The formula may fall more in your favor. If you wait until finding new employment, the disposable income calculation may preclude the most total relief.

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