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The Best Time to File for Bankruptcy

It is often stated that bankruptcy is a “last resort” for financially troubled consumers. This is not really true. In some cases, legal rights can be lost by delaying a bankruptcy. Be especially careful to get early advice about bankruptcy if you are concerned about saving your home or your car or protecting your bank account or wages from seizure.

For example, bankruptcy may not help you after your home is sold at a foreclosure sale or money in your bank account is seized. Bankruptcy can stop an eviction proceeding, but you have fewer rights in bankruptcy after a court has ordered you to be evicted. Act quickly to consider your bankruptcy rights.

While not ideal, all is not lost if you wait to the last minute before a foreclosure, repossession, or garnishment. Bankruptcies in an emergency can be filed with little preparation by filing only a brief petition, a statement of your Social Security number, and a list containing the names and addresses of your creditors. Additional forms must be completed and filed shortly thereafter.

But you must still complete an approved budget and credit counseling briefing before filing your bankruptcy. The counseling usually takes less than an hour; it can be done over the phone or over the internet.

On the other hand, if you are not facing immediate loss of property, but sometime in the future you will incur new debts that you will not be able to pay, a bankruptcy filing should be delayed until you incur those new debts. New debts incurred after the bankruptcy filing are not discharged in that bankruptcy case—you will still be obligated to repay those new debts. If you file too soon and incur a lot of debt after the filing, you may be back to where you started from or even worse.

If you file a first bankruptcy too soon, you will find it more difficult to file a second bankruptcy to discharge the new debts incurred after you file the first bankruptcy. After you first file a chapter 7 bankruptcy, you have to wait eight years to file another chapter 7 case. There is more flexibility to file a chapter 13 case after first filing a chapter 7 bankruptcy. It is a good idea to wait to file for bankruptcy until your debts have peaked.

If you decide to wait to file bankruptcy, avoid the temptation to go on expensive vacations or credit card shopping sprees that you do not intend to repay. In a chapter 7 bankruptcy, debts incurred in this way may be declared as not able to be discharged in the bankruptcy. On the other hand, other pre-bankruptcy expenses for medical care and other essentials are rarely challenged. Similarly, it may make sense before filing bankruptcy to purchase in installments needed medical or automobile insurance.