Timing can me an extremely important factor in your case. The most common timing issues are exempting and protecting assets in a Chapter 7 and passing the Means Test for Chapter 7 eligibility.
Protecting Assets
Understanding your exemptions and how they protect your property in bankruptcy
One of the biggest risks in a Chapter 7 bankruptcy is losing assets. What you are allowed to keep in a bankruptcy is determined by your ownership and equity in property and the applicable exemptions to protect that property. California has two sets of exemptions that are available to protect property: 1) The Homestead Exemptions, also referred to as the Traditional Exemptions; and 2) The Wildcard Set. There is also the Federal Non-Bankruptcy Set which are extra exemptions that can be used along with either set of California exemptions. You can read more about this in our article discussing the various exemption laws.
For certain assets that have a liquidated/cash value, the value on the petition date determines what goes into the “bankruptcy estate”. For instance, $1,000 in a bank account when you file your case is $1,000 into the bankruptcy estate. If you unexpectedly receive another $5,000 the next day, the bankruptcy estate is still just $1,000. For other assets where the value is not readily determined, such as a house or vehicle, this gets a bit more complicated since the value can change during the case and the trustee could either take advantage of the increase in value or they could be disadvantaged by the decrease in value.
Exemption Planning
If you are in a position where you have property that is not able to be protected in a bankruptcy, you may be able to delay filing so that you can rearrange your finances in order to maximize the amount of property you are able to claim as exempt. This is often referred to as “exemption planning”. There are many ways to go about exemption planning and it all really depends on the specifics of your situation.
Exemption planning can take time, sometimes years, or you might be in a situation where you might be receiving property in the future and you would want to file sooner than later.
DISCLAIMER: There is a very fine line between proper exemption planning and improper conduct which can come with serious penalties.
The Means Test
Determining when to file if your income is irregular
The Means Test is the cornerstone of the 2005 overhaul of the Bankruptcy Code referred to as the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). The purpose of the Means Test is to force individuals who have disposable income into a Chapter 13 repayment plan. As a starting point, the Means Test look as the past 6 months of your income, doubles that, and compares that to the yearly median income in your state for a household of your size. These figures, which are periodically adjusted, are posted by the Office of the United States Trustee, which is a branch of the United States Department of Justice that oversees bankruptcy proceedings.
If you are above-median as determined by the Means Test, your case is either going to be a complex Chapter 7 or you may end up being forced to file as a Chapter 13 with a five year payment plan.
However, the starting point of the Means Test is the purely mechanical 6-month lookback calculation of yearly income. If you are above-median and do not currently pass, but anticipate that your income will be dropping, this may be a situation where you would want to wait to file until the calculation drops to show that your income is below-median. If you are in a position where you do pass but anticipate your income will be increasing, this may be a situation where you would want to fast-track your case. The same principles would apply to your expenses. If your allowable actual* expenses are going to be increasing, then you might want to wait. If they are going to be reducing, then maybe file sooner.
*The expenses that are considered in the Means Test can break down into several categories: 1) standardized expense which may be more or less than your actual expense (e.g., if the standardized expense for food is $800, then you can only take a $800 deduction even if you actually spend more); 2) actual expenses (e.g., if your involuntary/mandatory retirement contribution is $1,000, you can take $1,000); 3) “special circumstances” expenses (i.e., certain expenses that are actual, not specified elsewhere in the Means Test, and necessary); and 4) not allowable expenses (e.g., voluntary retirement contributions).
Creditor Action
Often it is a creditor, or multiple creditors, who force you to strategically time the filing of your case. Usually this would be enforcement of a debt, such as repossession, wage garnishment, bank levy, but could also be judicial proceedings, such as a judgment, trial, or a judgment debtor exam.
Bankruptcy Look-back Periods
When someone files a bankruptcy, not only is their current financial situation a consideration, but there are several different look-back periods that can greatly affect a case. Including:
- 70 days: Presumption of non-dischargeability of cash advances
- 90 days: Presumption of non-dischargeability of debts for luxury goods or services; preferential transfer to ordinary creditors
- 1 year: Preferential transfer to insiders
Summary
These are just three of the more common timing issues that we see. There are plenty of other reasons that would justify a strategically timed filing. For this reason, it is better to stay on top of your situation and consider your bankruptcy options well in advance of the creditors knocking on your door.
