When Should You File for Bankruptcy?

You stopped opening the mail a while ago. The minimum payments go out every month, the balances do not move, and you are starting to wonder whether this is the year it all comes apart.

Most people wait too long to ask. Here is how to tell when it is time, when to file right away, and when to wait.

Do I have to be broke to file bankruptcy?

No. Bankruptcy is for people who cannot pay what they owe in a reasonable time, not only for people with nothing left.

You can own a home, a car and a retirement account and still be a good candidate. Exemptions, the laws that let you keep a set amount of property, protect more than most people expect.

The real question is whether your debt will ever get paid off on your current income. You do not have to be broke, but you do have to be honest: every asset, account and transfer goes on the paperwork.

Isn’t bankruptcy a last resort?

That is a myth, and an expensive one. Bankruptcy is a legal tool written into federal law, not a punishment.

Treating it as a last resort leads people to spend the very money bankruptcy would have protected. These are the mistakes I see most:

• Cashing out a 401(k) or IRA to pay credit cards. Most retirement accounts are protected in bankruptcy, so that money was already safe.
• Draining savings on debts that would have been discharged, meaning wiped out by the court’s final order.
• Borrowing from family, or taking a loan to pay off old debt with new debt.

If you file after doing any of these, the creditors keep the money and you still need the bankruptcy. Talk to a lawyer before you move money, not after.

What are the signs it is time to consider bankruptcy?

Ask yourself these questions:

• Are you making only minimum payments while the balances stay the same?
• Are you using credit cards for groceries, gas or rent?
• Are collectors calling, and are you screening every unknown number?
• Do you not know, even roughly, how much you owe?
• Would one car repair or medical bill put you under?

If you answered yes to more than one, it is time for a consultation. That does not mean you will file. Sometimes the answer is a settlement or one of the other alternatives to bankruptcy, and you should know your options before they narrow.

When should I file bankruptcy immediately?

When a creditor is about to take something. Filing triggers the automatic stay, a court order that takes effect the moment the case is filed and stops nearly all collection.

Your wages are being garnished. Every paycheck that goes out before you file is money that is hard to get back. Filing stops the garnishment.

A foreclosure sale is scheduled. The case has to be filed before the sale, not after. Chapter 13 can stop the sale and let you catch up the missed payments over time; see 7 ways to stop a foreclosure sale fast.

Your car is about to be repossessed. Filing before the tow truck comes saves the repossession and storage fees, and once the car is sold at auction, it is too late.

You have been sued. A collection suit in DC Superior Court, a Maryland district court or a Virginia general district court becomes a judgment if you do nothing, and a judgment leads to garnishment. If the lawsuit is your only problem, settling it may be enough.

One limit: the automatic stay does not stop the collection of child support or alimony.

When should I wait to file?

Sometimes waiting a few weeks or months gets you a better result. These are the times I usually tell people to hold off.

You are about to take on new debt. A Chapter 7 discharge covers only debts that exist on the day you file, and you cannot get another Chapter 7 discharge in a case filed within eight years. If you have surgery scheduled or a big expense coming, it may be better to file after the bills arrive.

You are expecting a windfall. A large tax refund, a bonus, a lawsuit settlement or an inheritance can be pulled into the bankruptcy if the timing is wrong. An inheritance you become entitled to within 180 days after filing goes into the case too, so tell me about anything you expect.

Your income just dropped. The means test, the income screen for Chapter 7, averages your income over the six full calendar months before you file. If you recently lost a job or hours, waiting a month or two can pull that average under the median and make Chapter 7 available.

You recently paid back a relative or gave away property. The trustee can recover payments to family members made within one year before filing, and can undo gifts and below-value sales. Waiting, or planning around it, can keep the trustee from suing the person you paid or gave property to.

You made big purchases or took cash advances on credit. Luxury charges and cash advances taken shortly before filing can be challenged as nondischargeable, meaning the debt survives the bankruptcy. Those charges need time to age.

If one of these applies and you also have a garnishment or a sale date, the emergency usually wins.

Does waiting cost me anything?

Usually, yes. Interest and late fees keep growing, a lawsuit can add court costs and attorney’s fees to the balance, and a garnishment takes money from every paycheck.

Your credit also keeps taking hits. Every missed payment, collection account and judgment is another negative mark, and the work of building credit after bankruptcy does not start until the case is filed.

Is bankruptcy the right choice for me?

Not always. If you can pay your debts in a reasonable time, pay them.

Bankruptcy also does not fix everything. Most student loans, recent income taxes and child support survive it, and the filing stays on your credit report for years.

In a consultation, I look at your last six months of income, what the exemptions protect, and whether anything in the last year needs to age. Then I tell you whether to file, when, and under which chapter.

What should I do right now?

If you have a garnishment, a foreclosure sale date, a repossession notice or a lawsuit, call me today at (202) 448-5136. These are the situations where days matter.

If none of that is happening yet, call anyway. The consultation is free, and I will tell you whether to file now, wait, or skip bankruptcy entirely.

I handle bankruptcy in DC, in Maryland at the Greenbelt courthouse, and in the Eastern District of Virginia. Don’t wait for rock bottom. The best time to plan a bankruptcy is while you still have something to protect.