Claiming bankruptcy can give you a pretty big stick to drive the wolf away when you find him at your door. Your first thought probably isn’t to check the calendar before you file -- but it should be. Filing at the wrong time of year can cost you money, and in some cases, it can even determine if you’re eligible for Chapter 7 or must file for Chapter 13 instead. Chapter 7 involves the trustee selling your assets to pay off as much of your debt as possible, but most debtors' assets are exempt from liquidation. If you must file for Chapter 13, you'll have to pay down your debts with your disposable income.
If you're expecting a tax refund, filing for bankruptcy right before you receive it usually isn't a good idea. Your property, including cash on hand, becomes your bankruptcy estate when you file for Chapter 7. You’re allowed to keep some equity and value in your assets, but your other nonexempt property is available to the trustee. He can sell tangible assets to pay down your debts and he can take cash -- like your tax refund -- to give to your creditors. If you file for bankruptcy before you receive your tax refund, you can pretty much anticipate that the trustee will take the money when it comes in.
Consider waiting to file bankruptcy until after you receive your refund and you’ve spent it on necessary expenses. Necessary is the key word here. The trustee or even your creditors can look at your expenditures in the months before you file. If you drop $3,000 on an incredible new LED television for that blank wall in your family room, it may get you in trouble -- and, in fact, the trustee might be able to take it and sell it to pay down your debts. But if you use the money to repair your car, pay for medical care or stock up on groceries, you’re fine. The purchases must be necessary. If you’re unsure, speak with a lawyer or legal aid before you spend the money.
Next Year's Refund
You might not want to wait until late in the year to file for Chapter 7 because there’s next year’s tax refund to consider, too. What you’ve earned during the calendar year leading up to your bankruptcy filing belongs to your bankruptcy estate, too. If you file for bankruptcy on the last day of January, one-twelfth of next year’s refund goes to your creditors. If you file on the last day of December, the trustee has a right to your entire refund for that year.
Tax issues aside, the first part of the year might not be a good time to file if you’re particularly generous during the holiday season. If you charge a lot of purchases at Christmas or Hanukkah, then you promptly file for bankruptcy in January, the trustee can make a case that you’ve committed bankruptcy fraud. You made charges knowing you were not going to pay for them. At best, your creditors can object to discharge of these debts and if the court rules in their favor, you’ll still owe the money after your bankruptcy is over. At worst, if you really go overboard with purchases, the court can dismiss your whole case and you’ll still owe all your debts.
Eligibility for Chapter 7 depends on your average monthly income over the six months immediately before you file. If your income is too high, you must file for Chapter 13 instead. If you pick up extra seasonal work, maybe in construction in the summer or in retail during the winter holidays, this can bump your income up during those months and raise your six-month average. You could lose your eligibility for Chapter 7 unless your income was average -- or even depressed -- over the previous 180 days.