In some situations, it makes sense to hold off on filing for Chapter 7 or Chapter bankruptcy. Sometimes, filing bankruptcy too early can mean losing property you would have otherwise been able to keep, or having to file for Chapter 13 instead of Chapter 7. Other times, you may be able to deal with debt in other ways, and avoid bankruptcy altogether. Read on to learn more about several situations when it might be beneficial to delay bankruptcy.

If You Have an Opportunity to Modify Your Mortgage

These days, many people file for bankruptcy to delay a foreclosure. While bankruptcy can be a good solution in this situation, many people file much earlier than they need to, which makes it more difficult to obtain a mortgage modification. Once you file for bankruptcy, many lenders will refuse to enter into or continue negotiations over your mortgage. Because your bankruptcy will cancel the promissory note part of your mortgage (but not the lien on the house), technically there will be nothing left to negotiate. If you might want to seek a mortgage modification in the future, you probably should avoid bankruptcy -- at least until you know which way the modification winds are blowing.

If Your Recent Income Has Been High

When you file for Chapter 7 bankruptcy, the court will look at your income over the past six months to determine whether you are eligible, using what's called the "means test." If your income is too high, you may file only for Chapter 13 bankruptcy, which requires you to repay a portion of your debts.

If your income has dipped recently because of a pay cut or layoff, you can often become eligible for Chapter 7 by simply waiting a few months. Once several months of decreased income are figured into the means test, your average income over the past six months may be low enough to qualify.

For example, assume that your average gross income for the previous six months is $8,000 per month, but that you were just laid off and are now getting $1,500 per month in unemployment. If you wait two months to file, your six-month average gross income will drop from $8,000 to less than $5,900 a month, which will bring you into eligibility for Chapter 7 bankruptcy in most states. If You Have Property You Don't Want to Lose

You may have property that you would lose in a Chapter 7 bankruptcy if you file now, but that you could keep if you wait -- or at least have time to sell and use the proceeds. For example:

• Assume you are expecting a tax refund of $4,000. You would have to surrender it to the bankruptcy trustee if you receive it after you file. However, if you first get your tax refund, spend it over a few months on necessities, and then file for bankruptcy, you would have the full benefit of the refund.
• Assume you have assets that are worth more than the amount you're allowed to keep in bankruptcy through "property exemptions." If you wait a few months to file, the property could sufficiently depreciate in value to fall within a property exemption. For instance, say you own a car worth $6,000 but your state exemption laws allow you to keep a car with a value only up to $5,500. If you wait a few months, the car's value could drop by enough to bring it within the exemption.
• Assume that you have assets that aren't exempt -- that is, the bankruptcy trustee can take the property and sell it to pay off your creditors. (Items other than your house, car, household goods, clothing, and other necessities are often nonexempt.) If you sell the property for its fair market value before you file for bankruptcy, and then spend the proceeds on necessities, you, rather than your creditors, would benefit from the property. (Or, you might be able to use the proceeds to buy property that is exempt from being sold in bankruptcy, such as a burial plot or a vehicle--but talk to a lawyer before you try this one, it could get you in trouble in some circumstances.)

If You Anticipate Having New Debts Soon

It's a good idea to hold off on filing for bankruptcy if you foresee other significant expenses in the near future. As a general rule, Chapter 7 bankruptcy only erases debts you have as of your filing date. Debts that come along later will be yours to deal with, sometimes for years to come. For example, if you will be having knee replacement surgery in the next year and you will have to pay some or all of the expenses, those expenses will be wiped out if you wait to file for Chapter 7 bankruptcy until after your surgery.

If You've Incurred New Debt or Transferred Property Recently

Certain payments and transfers that you make before filing bankruptcy cannot be undone in bankruptcy, and may even jeopardize the bankruptcy itself. Here are the most common issues to watch for:

• If you charge more than $550 in luxury goods or services on any one credit card within 90 days of filing for bankruptcy, the court can presume that you made the charges fraudulently -- that is, that you never intended to repay the credit card company. If this happens, the charges would survive your bankruptcy instead of being wiped out with your other debt.
• Likewise, if you run up cash advances totaling $825 or more on any one credit card within 70 days of filing for bankruptcy, the cash advances can be considered fraudulent and can survive your bankruptcy.
• If you pay more than $600 to a commercial creditor within 90 days of filing for bankruptcy -- or to a relative or business associate within a year of filing for bankruptcy -- the bankruptcy trustee can take the money back ("recapture" it, in bankruptcy lingo) and distribute it to your creditors.
• If you've transferred any type of property to others within the past two years, either by giving it away or selling it for less than it was worth, the bankruptcy trustee can take it back and distribute it to your creditors. (unless it fits within a property exemption). The trustee can even challenge your right to a bankruptcy discharge if it can prove that you transferred the property to try to hide if from the bankruptcy court.

By waiting until these various time periods are over, you avoid the risk that these debts might survive -- or even sabotage -- your bankruptcy filing.

If You Can't Make Your Installment Debt Payments

A surprising number of people start thinking about bankruptcy when they fall behind on their credit card payments. Some people who are unfamiliar with our legal system believe they will go to jail if they stop paying. Not true. Furthermore, most creditors, including credit card companies, banks, and medical-care providers, can't go after your wages, bank account, or home unless they first sue you in court and win.

Suing you takes time and money, and not all creditors are willing to take this step. If a creditor does sue you, you'll be personally served with a summons and complaint, after which you'll typically have 30 days to file a simple response that denies the allegations and makes the creditor prove its case at a trial months or even years down the road.

Because of the potential expense involved in bringing a lawsuit, many creditors instead will declare the debt as "uncollectable" and write it off on their taxes. If you don't own real estate and have few assets that could be seized, or you are unemployed or receiving Social Security, this is likely to happen in your case. In other words, while bankruptcy can get rid of most debts, you may be able to just stop making your payments without any consequences (except lowering your credit score), and save the bankruptcy fees. If a creditor does sue you later and win, and you have assets or income to lose, you can always file bankruptcy to get the debt wiped out.

If You Just Want to Stop Collections

Probably the most common reason people think of filing for bankruptcy is to put an end to the blizzard of telephone calls that comes your way once you stop paying on your credit card or other installment debts. While a bankruptcy filing provides a quick solution to this problem, so does a federal law called the Fair Debt Collection Practices Act (FDCPA). The FDCPA (Title 15 U.S.C. Section 1692c) and the laws of many states require creditors and collection agencies to stop calling you at your home or workplace if you ask them to. Or, as one judge of my acquaintance recently told a bankruptcy filer, "If you don't want your creditors calling you, change your number."

If You Need Help Deciding

It's not always easy to weigh the pros and cons of filing for bankruptcy against the consequences of waiting it out.  Contact the attorneys at Hope Law Group for a free consultation to guide you through this process.

Copyright 2010 Nolo, http://www.nolo.com

The changes to bankruptcy law in 2005 may be making it harder for some people to file bankruptcy. A few filers with higher incomes will no longer allowed to use Chapter 7 bankruptcy, but will instead have to repay at least some of their debt under Chapter 13. In addition, the 2005 law requires all debtors to get credit counseling before they can file a bankruptcy case -- and additional counseling on budgeting and debt management before their debts can be wiped out.

Here are some of the most important changes in the 2005 bankruptcy law.

Restricted Eligibility for Chapter 7 Bankruptcy

Under the old rules, most filers could choose the type of bankruptcy that seemed best for them -- and most chose Chapter 7 bankruptcy (liquidation) over Chapter 13 bankruptcy (repayment). The law passed in 2005 prohibits some filers with higher incomes from using Chapter 7 bankruptcy.

How High is Your Income?

Under the rules enacted in 2005, the first step in figuring out whether you can file for Chapter 7 bankruptcy is to measure your "current monthly income" against the median income for a household of your size in your state. If your income is less than or equal to the median, you can file for Chapter 7 bankruptcy. If it is more than the median, however, you must pass "the means test" -- another requirement of the new law -- in order to file for Chapter 7.

The Means Test

The purpose of the means test is to figure out whether you have enough disposable income, after subtracting certain allowed expenses and required debt payments, to make payments on a Chapter 13 plan. To find out whether you pass the means test, you subtract certain allowed expenses and debt payments from your current monthly income. If the income that's left over after these calculations is below a certain amount, you can file for Chapter 7.

Counseling Requirements

Before you can file for bankruptcy under either Chapter 7 or Chapter 13, you must complete credit counseling with an agency approved by the United States Trustee's office. (To find an approved agency in your area, go to the Trustee's website, www.usdoj.gov/ust, and click "Credit Counseling and Debtor Education".) The purpose of this counseling is to give you an idea of whether you really need to file for bankruptcy or whether an informal repayment plan would get you back on your economic feet.

Counseling is required even if it's obvious that a repayment plan isn't feasible or you are facing debts that you find unfair and don't want to pay. You are required only to participate, not to go along with any repayment plan the agency proposes. However, if the agency does come up with a repayment plan, you will have to submit it to the court, along with a certificate showing that you completed the counseling, before you can file for bankruptcy.

Toward the end of your bankruptcy case, you'll have to attend another counseling session, this time to learn personal financial management. Only after you submit proof to the court that you fulfilled this requirement can you get a bankruptcy discharge wiping out your debts. (The website above also lists approved debt counselors.)

Lawyers May Be Harder to Find -- and More Expensive

The changes to bankruptcy law enacted in 2005 added some complicated requirements to the field of bankruptcy. This made it more expensive -- and time-consuming -- for lawyers to represent clients in bankruptcy cases, which means attorney fees have gone up. The 2005 law also imposed some additional requirements on lawyers, chief among them that the lawyer must personally vouch for the accuracy of all of the information their clients provide them. This means attorneys have to spend more time on bankruptcy cases, and they charge their clients accordingly.

Some Chapter 13 Filers Will Have to Live on Less

Under the old rules, people who filed under Chapter 13 bankruptcy had to devote all of their disposable income -- what they had left after paying their actual living expenses -- to their bankruptcy repayment plan. The 2005 law added a wrinkle to this equation: Although Chapter 13 filers still have to hand over all of their disposable income, they have to calculate their disposable income using allowed expense amounts dictated by the IRS -- not their actual expenses -- if their income is higher than the median income in their state. These allowed expense amounts must be subtracted not from the filer's actual earnings each month, but from the filer's average income during the six months before filing.

Other Changes

Other changes were made in 2005 that have affected some bankruptcy filers negatively, including how property is valued (at replacement cost instead of at auction value, which means more debtors are at risk of having their property taken and sold by the trustee) and how long a filer must live in a state to use that state's bankruptcy exemption laws (this can make a big difference in the amount of property a bankruptcy filer gets to hold on to).

Copyright 2010 Nolo, http://www.nolo.com

Although bankruptcy eliminates some debt, it doesn't eliminate all types of debt. Before you file for bankruptcy, make sure you know which debts will be wiped out and which will remain. For the most part, you can get rid of credit card debt through Chapter 7 and Chapter 13 bankruptcy. But you may not be able to eliminate other types of debt, including child support, alimony, most tax debts, student loans, and secured debts. In some situations, Chapter 13 can help, whereas Chapter 7 cannot.

Read on to learn how different types of debt are treated in bankruptcy. 

What Bankruptcy Can Do

If you are facing serious debt problems, bankruptcy may offer a powerful remedy. Here are some of the things filing for bankruptcy can do:

Wipe out credit card debt and other unsecured debts. Bankruptcy is very good at wiping out credit card debt. Unless you have a special "secured" credit card, your credit card balance is an unsecured debt -- that is, the creditor does not have a lien on any of your property and cannot repossess any items if you fail to pay the debt. This is precisely the kind of debt that bankruptcy is designed to eliminate. Besides credit card debt, you may have other unsecured debts, and bankruptcy can wipe these out as well.

If you file for Chapter 13 rather than Chapter 7, you may have to pay back some portion of your unsecured debts. However, any unsecured debts that remain once your repayment plan is complete will be discharged.

Stop creditor harassment and collection activities. Bankruptcy can stop creditor harassment, but if the "harassment"' is simply phone calls and letters, there are simpler ways to stop it. If the harassment is more serious -- for instance, if the creditor is about to repossess your car or foreclose your mortgage -- bankruptcy can help.

Eliminate certain kinds of liens. A lien is a creditor's right to take some or all of your property and will survive bankruptcy unless you invoke certain procedures during your bankruptcy case.

What Bankruptcy Can't Do

Here's what bankruptcy cannot do for you:

Prevent a secured creditor from repossessing property. A bankruptcy discharge eliminates debts, but it does not eliminate liens. So, if you have a secured debt (a debt where the creditor has a lien on your property and can repossess it if you don't pay the debt), bankruptcy can eliminate the debt, but it does not prevent the creditor from repossessing the property.

Eliminate child support and alimony obligations. Child support and alimony obligations survive bankruptcy -- you will continue to owe these debts in full, just as if you had never filed for bankruptcy. And if you use Chapter 13, your plan will have to provide for these debts to be repaid in full.

Wipe out student loans, except in very limited circumstances. Student loans can be discharged in bankruptcy only if you can show that repaying the loan would cause you "undue hardship," a very tough standard to meet. You must be able to show not only that you cannot afford to pay your loans now, but also that you have very little likelihood of being able to pay your loans in the future.

Eliminate most tax debts. Eliminating tax debt in bankruptcy is not easy, but it is sometimes possible for older debts for unpaid income taxes. There are many requirements to be met, however.

Eliminate other nondischargeable debts. The following debts are not dischargeable under either Chapter 7 or Chapter 13 bankruptcy:

• debts you forget to list in your bankruptcy papers, unless the creditor learns of your bankruptcy case
• debts for personal injury or death caused by your intoxicated driving, and
• fines and penalties imposed for violating the law, such as traffic tickets and criminal restitution.

If you file for Chapter 7, these debts will remain when your case is over. If you file for Chapter 13, these debts will have to be paid in full during your repayment plan. If they are not repaid in full, the balance will remain at the end of your case.

In addition, some types of debts may not be discharged if the creditor convinces the judge that they should survive your bankruptcy. These include debts incurred through fraud, such as lying on a credit application or passing off borrowed property as your own to use as collateral for a loan.

What Only Chapter 13 Bankruptcy Can Do

Chapter 7 can't help you with these situations, but Chapter 13 can:

Stop a mortgage foreclosure. Filing for Chapter 13 bankruptcy will stop a foreclosure and force the lender to accept a plan where you make up the missed payments over time while staying current on your regular monthly payments. To make this plan work, you must be able to demonstrate that you will have enough income in the future to support such a repayment plan.

Allow you to keep nonexempt property. You don't have to give up any property in Chapter 13 because you use your income to fund your repayment plan.

"Cram down" secured debts that are worth more than the property that secures them. You can sometimes use Chapter 13 to reduce a debt to the replacement value of the property securing it, then pay off that debt through your plan. For example, if you owe $10,000 on a car loan and the car is worth only $6,000, you can propose a plan that pays the creditor $6,000 and have the rest of the loan discharged. However, under the new bankruptcy law, you can't cram down a car debt if you purchased the car during the 30-month period before you filed for bankruptcy. For other types of personal property, you can't cram down a secured debt if you purchased the property within one year of filing for bankruptcy.

Copyright 2010 Nolo, http://www.nolo.com