This is one of our most frequently asked questions: when is the best time of year to file for bankruptcy? Is there an advantage to filing in December, right before the calendar turns the page to a new year, or is it more advantageous to wait until after your tax returns have been filed in April?
The answer: it depends. Deciding to file for Chapter 7 or Chapter 13 should come after careful consideration of your individual circumstances (and after consultation with a bankruptcy attorney). When we advise clients, we take a look at their cash flow and their debts, and develop a plan based on their immediate needs and money that may be coming from various sources. Occasionally there’s an advantage to waiting to file, if a client is expecting a windfall from an inheritance, settlement, or property sale. It’s hard to protect this asset from the court if bankruptcy has been already declared, so in these situations it’s often best to declare until after you’ve received and spent this money.
There’s also the issue of paying for the bankruptcy; it seems ironic that people who don’t have enough money to afford their bills are being asked to pay up more for the legal costs of filing Chapter 7 or Chapter 13, but declaring bankruptcy isn’t free.
This means that spring–March, April, and May–is a very popular time to file, considering that tax returns and their attendant refunds make funding a bankruptcy easier. File before your tax refund comes in, and that means any cash you will receive as a refund will become an asset and therefore part of your bankruptcy estate. The trustee in your case will demand that the refund be turned over to him, so that can be used to pay off your debts. However, if you file after your tax refund comes in, and you can (carefully) use your refund to pay off necessary expenses. Often, we see clients using that money for their legal fees. However, you should be careful how you spend a refund shortly before filing for bankruptcy, and it is best to get legal advice before you start making decisions about what to do with a refund.
For this same reason, if you are expecting a significant refund, all things being equal, you will want to file earlier in the year, rather than later in the year. Of course, most financial planners will tell you it is best to adjust your dependants so as to minimize the amount of refund you are receiving–why give the IRS an interest-free loan of your hard earned money?
Still have questions? Bankruptcy rules are be confusing, and we’re happy to be your guide. Call Orlando bankruptcy attorney Jeffrey Badgley at (407) 781-0420 for a free, no-obligation consultation on how to prepare for filing bankruptcy in the new year.