When is the Best Time to File a Chapter 7 Bankruptcy?

Filing for a Chapter 7 bankruptcy case can be a stressful process, especially without the guidance of an experienced attorney.  Filing bankruptcy is a complicated process, and many people feel very unsure about what exactly a Chapter 7 case entails and can do for them.  The timing of the filing of a case is one of the most important aspects for many bankruptcy cases.  There can be significant disadvantages to filing too early or too late.  On the other hand, there can be significant advantages to filing immediately or waiting a bit.  Below is a discussion of some of the more common factors that should be considered when trying to decide the best time to file a Chapter 7 bankruptcy.

High Recent Income or Increasing Income

When filing for bankruptcy you must choose which chapter, the most common being Chapter 7.  When filing for Chapter 7 bankruptcy, the court will look at the income you had for the past six (6) months, which will be input into a bankruptcy means test.  To determine whether you are eligible to file for Chapter 7, the court will look to see if the means test was completed correctly and what the results are.  The means test will ask for your income based on the most recent six (6) month average, and through the means test calculations the court will determine your eligibility to receive a Chapter 7 discharge.

If your income is too high, then you will be required to file for a Chapter 13 bankruptcy.  A Chapter 13 bankruptcy does not discharge all of your debt, instead it consolidates your debts into a manageable payment plan.  Some or most of your debts that are not paid through the Chapter 13 process can be discharged eventually.  However, this is only after a three to five year payment plan has been completed.  Most people prefer to file a Chapter 7 if at all possible, due to its comparatively quick and effective results.

However, qualifying for a Chapter 7 frequently comes down to the timing of the case’s filing.  If you had a high income while you were working but you recently took a pay cut or even lost your job, waiting a few months can make a big difference in your eligibility.  After a few months of decreased income are entered into the means test, your income may be low enough for you to proceed with a Chapter 7 bankruptcy.  For instance, if your normal income is $7,000 every month but you lose your job and you now receive $2,000 from unemployment, waiting a couple of months will reduce your six (6) month average income, making you eligible for a Chapter 7 bankruptcy case filing.

It has been our experience that is never too early to speak with an experienced bankruptcy attorney.  We routinely see people that have missed the opportunity to file a Chapter 7 bankruptcy by only a month or two by not seeking advice sooner.  However, this could have been avoided by merely seeking a consultation with an experienced Georgia bankruptcy attorney early on in the process.

When Property is a Factor

When filing for a Chapter 7 bankruptcy, while rare for the vast majority of filers, it is possible that you may lose some property.  If there is some property you absolutely want to keep, consider waiting for a period of time.  For instance, if you have an asset you no longer need, you could sell that asset and spend the proceeds on necessities over the next few before you file.  That way instead of losing the property, you benefited from its value.

In another case, when you file for bankruptcy there are certain assets you can keep through property exemptions.  If the value of the property you want to keep is too high, waiting a few months can be helpful in case the assets depreciates in value which might bring it within exemption range.  It is important to note that while Georgia offers rather generous exemptions (protection) for most property that a filer may have, the following assets are the most likely to be at risk in a Chapter 7 bankruptcy case:

• multiple vehicles that are paid for in full
• real estate that has very significant equity
• cash or cash equivalent savings
• significant non-retirement assets that can easily be sold and converted into cash (liquid, non-retirement assets)
• a significant inheritance
• precious metals, jewels, and jewelry

The vast majority of Chapter 7 bankruptcy cases filed in Georgia are considered “no asset” cases because there is no actual liquidation of assets for the benefit of creditors.  This is because Georgia and Federal law provides for rather generous protection for most assets a person may own that is filing bankruptcy.  See O.C.G.A. § 44-13-100.

However, it is important to speak with an experienced bankruptcy attorney if you are worried about losing assets.  It has been our experience that most fears of losing property in a Chapter 7 bankruptcy are unfounded or can be resolved or mitigated.

There is an Opportunity to Modify your Mortgage

Trying to forestall a foreclosure is one of the common reasons people file for bankruptcy.  This is because filing a bankruptcy cases invokes the automatic stay, which can stop a foreclose, so long as the case is filed before the scheduled foreclosure date.  See 11 U.S. Code § 362 – Automatic stay.

As soon as a person learns there home or other real property is being foreclosed on, they rush to file for bankruptcy without considering any alternatives.  While filing for bankruptcy is often the best solution, it could make it much more difficult to obtain a mortgage loan modification later.  This is due to the mortgage lender refusing to begin or continue negotiations for the mortgage because the bankruptcy will usually discharge the filing obligation to the promissory note for mortgage.

If the filer plans on trying to get a modification on their mortgage in the future, it is probably best to wait on filing bankruptcy, at least until you are surer about your choice between a loan modification or bankruptcy.

However, if your home is already scheduled for a foreclosure, not filing bankruptcy can mean that your home will be foreclosed on, making the issue of obtaining a loan modification moot.

New and Recent Debts

If you think that you will be actively acquiring any new debts, it is advisable to hold off on filing for bankruptcy.  It is important to remember that a Chapter 7 bankruptcy might not discharge very recent and significant debts incurred just before filing.  Also, any debts you incur after you file a Chapter 7 bankruptcy case will not be a part of the discharge, and you will be responsible for their timely payment.  It is best to wait to make sure you will not be incurring any new debt anytime soon so that when you file, and that you are filing with all of your debts disclosed on your bankruptcy petition.

You Want to Discharge Income Tax Debts

In other cases, it is possible to erase some income tax obligations as a part of a bankruptcy case.  One of the requirements to be able to discharge income tax obligations is that they have to be old enough, so waiting until the time requirements (along with the other preconditions) are met is a good idea.  If you want to eliminate income tax debts in a Chapter 7 bankruptcy case, timing is very important.  It is important to remember, only personal income taxes can be discharged, and the general rules are as follows:

 You can discharge (wipe out) debts for federal income taxes in Chapter 7 bankruptcy only if all of the following conditions are true:

• The taxes to be discharged are personal income taxes. Taxes other than income, such as payroll taxes or fraud penalties, are not discharged in bankruptcy.
• You did not commit fraud or willful tax evasion. If you filed a fraudulent tax return or otherwise willfully attempted to evade paying taxes, such as using a false Social Security number on your tax return, bankruptcy will not discharge the income taxes.
• The tax debt is at least three (3) years old. To eliminate a tax debt, the tax return must have been originally due at least three years before you filed for bankruptcy.
• You actually filed a tax return. You must have filed a tax return for the debt you wish to discharge at least two years before filing for bankruptcy. (In most courts, if you file a late return (meaning your extensions have expired and the IRS filed a substitute return on your behalf), you have not filed a “tax return” and cannot discharge the income tax.  In some courts, you can discharge tax debt that is the subject of a late return as long as you meet the other criteria.
• You pass the “240 day rule.” The income tax debt must have been assessed by the IRS at least Two Hundred Forty (240) days before you file your bankruptcy petition, or must not have been assessed yet.  This time limit may even be extended if the IRS suspended collection activity because of an offer in compromise or a previous bankruptcy filing.
• The IRS and State of Georgia (and/or Other States) were listed on your bankruptcy petition.

The above is only a general discussion of the rules for eliminating income tax debts as a part of a Chapter 7 bankruptcy case.  It is important to speak with an experienced bankruptcy attorney regarding your specific situation.  Many people are not sure about the status of their previous tax returns, so it is best to start collecting this information if you wish to list and discharge income tax debts in a bankruptcy case.

You Recently Moved or Changed Your Residence

There are venue and jurisdiction requirements for filing a Chapter 7 bankruptcy in Georgia or any other state.  You can still file a bankruptcy case in Georgia, so long as you have resided in Georgia for at least six (6) months.  The rules regarding this requirement are frequently misinterpreted by new or less experienced bankruptcy attorneys.

There is also another a residency requirement for the bankruptcy exemptions you will use when filing bankruptcy in a state that you have resided in for less than two (2) years.  For example, you must have resided in Georgia for at least two (2) years before you are eligible to use that Georgia’s bankruptcy exemptions.   Otherwise, you will need to use the bankruptcy exemption requirements from your previous home state.

While the above issues usually this make very little difference in the vast majority of bankruptcy cases filed, it is something you will want to discuss with an experienced bankruptcy attorney.  Less experienced bankruptcy attorneys might not even know about these requirements, which could cause technical problem with your case.

In any event, it is strongly advised to speak with an experienced bankruptcy attorney and look at both states’ bankruptcy exemptions if planning on filing for bankruptcy and are moving, or have recently moved.

Obtaining Help With Your Georgia Chapter 7 Bankruptcy Case

The issues discussed above are only a few of the more common issues that the timing of a chapter 7 bankruptcy filing in Georgia.  If you are planning to file a Chapter 7 bankruptcy case in Georgia, call us at 770-609-1247 to speak with one of our experienced attorneys today.  Contact >

Updated: 2019-06-11