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Timing the Filing of Your Bankruptcy Petition: A Critical Consideration in Some Bankruptcy Cases

The date selected for your bankruptcy case may have a significant impact upon the results you obtain in bankruptcy because the bankruptcy filing date is looked to as a starting point for many issues which arise in bankruptcy, including those pertaining to (i) your qualifying for Chapter 7 and the amount required for you to pay in Chapter 13; (ii) your ability to keep an inheritance after bankruptcy; (iii) whether or not payments you made to creditors, including relatives, will be taken back from them as a “preference” or “fraudulent conveyance” by the Trustee.

Form 22

Form 22 looks to the income made in your household in the six months prior to the month that you choose to file your bankruptcy case. Where income is below medium income for the same-size household as yours, then Form 22 will not be a signifcant factor in your case. However, for some of you, whether or not you are above or below medium income can depend on the month you file the case, if your income has fluctuated in the last six months or more. Consider the following two examples showing gross income earned:

Example 1:

6 months ago: $9,000.
5 months ago: $9,000.
4 months ago: $9,000.
3 months ago: $9,000.
2 months ago: New employment $2,000.
1 month ago New employment $2,000.

Example 2:

6 months ago: unemployed.
5 months ago: $0.
4 months ago: $0.
3 months ago: $0.
2 months ago: $0.
1 month ago: $7,000.

In the first example, this person may want to wait a few months to file because looking back, the six month period shows an unusually high income. By waiting several more months, you will more likely easily get through the Chapter 7 system without needing to take unusual efforts to explain the changes to the United States Trustee’s Office as to why you should qualify for Chapter 7 relief.

In the second example, this client just got employed making a significant amount of money, which if it is averaged over a 6-month period, will put him above average income and thus likely require a 5-year commitment period of repayment of his disposable income. This could result in a tremendous amount of money being payed to creditors and could possibly make the required Chapter 13 case a hardship to support.

On the other hand, if this client files now with the benefit of looking back six months earlier, there is only one month that he had a higher income (the most recent month) with all his incomes being $0 or perhaps unemployment income which is low. This would likely mean that he would qualify for a Chapter 7 or, even if a Chapter 13 were required, a the repayment commitment period would be 3-year period (rather than the 5-year period which would require that more money be paid). Thus, by delaying the filing of this case, the client will have a much higher Form 22 amount which will likely require a 5-year commitment and likely disqualify him from Chapter 7.

Inheritance: There is a 180-day rule in bankruptcy that calls for all property from qn inheritance to go to creditors if the inheritance occurs withing 180 days after the filing of the bankruptcy petition. This may come as a surprise to some clients because they were not expecting the inheritance as the person who died was young or they weren’t expecting an inheritance from the particular person who died. In such a case, one can not easily plan when to file the bankruptcy in light of the 180 day inheritance rule.

However, where a person is elderly or sick and an inheritance is expected, the client will have an opportunity to discuss with counsel how best to approach the situation. If it is anticipated that a death will result after 180-days, then it may be best to file promptly. In the alternative, if the death is anticipated within 180 days, the client may have questions about how much is anticipated and should the bankruptcy case be delayed and the funds used before filing (and if so, on what?). This is called pre-bankruptcy planning and should be done carefully with the advice of an attorney because if done wrongfully, it may result in the denial of a discharge.

Preference: Payments outside the ordinary made to creditors within 90 days are considered a preference and could be taken back by a Trustee after you file. Similarly payments to a relative within one year prior to filing for bankruptcy can be taken back by a Trustee in bankruptcy. Therefore, if any such payments were made, it may be better to delay the filing beyond the 90 days or one year from the time that the payments were made.

Whether you do so or not will depend on your particular situation. For example, if a recent payment to your relative was $3,000, but you need to file in the next two weeks to save your house from a forclosure sale, it may be prudent to simply accept that there will be a $3,000 issue in your bankruptcy case and go forward with the bankruptcy case now to save your house from a foreclosure.

Fraudulent Conveyance: A fraudulent conveyance is a transfer to somebody else for less than a reasonably equivalent value. In New York State, a Trustee could look back up to six years from the date of the filing of the petition to see if such conveyances were made, and if so, may be able to undo those conveyances. Additionally, there is a 10-year look-back under Federal rules for fraudulent conveyance. If you need to file for bankruptcy and cannot wait for the 6-year or 10-year period to expire, you may wish to discuss with your attorney the risks involved with filing the petition.

Cash Advances: Cash advances taken in the 70-90 days before the bankruptcy case is filed are presumed to be fraudulent in Chapter 7 and may, if requested by creditor formally, result in a judgment of non-dischargeability from the Bankruptcy Court.

Thus, this is one issue that should be addressed prior to filing for bankruptcy. It many cases it may be better to simply delay the filing of the petition more than that 70-90-day period to avoid the issue.

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