The premise of this post is that the debtors in question need to file Chapter 7 bankruptcy to discharge their debts and focuses only on the timing of their bankruptcy filings. Also this post refers to the Means Test which is a qualification test and potential roadblock to filing Chapter 7 which is explained in more detail in prior posts on this Blog. The following are some common scenarios based on my experience with past clients with explanations of the appropriate filing times.
1) Engaged Persons:
A) In a situation where only one of the two future spouses has debt problems filing Chapter 7 before the marriage will be appropriate especially if the combined income of the married couple will put them over the household median and make the filing subject to the means test. Important to remember once married even if only one spouse files the non-filing spouse's income is included in the means test. There also is the clear advantage of having the future spouse obtain the fresh start from their debts before their marriage thereby eliminating any turmoil these debts may cause between spouses.
B) Where both parties need to file Chapter 7 it will make sense for them to file as individuals before their marriage if their individual incomes are below the household median for the means test and above if combined. If the combined incomes will not put the married couple above the median income than filing after marriage will likely make more sense as long as their monthly combined net income less their joint expenses does not leave them with too much excess income. One main reason is that they can file together as a married couple thereby eliminating the fees and expenses of two individual filings. Filing together also holds true if one future spouse due to their income cannot file individually under means test, but will qualify together with spouse who may have low income or children that will increase household size so they will avoid means test filing as married couple.
2) Foreclosure Scenarios:
A) Debtor wants to delay foreclosure and prolong stay in home. Under this scenario as long as there are no other pressing needs to file right away, for example a pending wage execution, delaying the filing till right before a foreclosure auction or on the debtor's law day if there is a judgment of strict foreclosure will maximize the additional delay bankruptcy can provide.
B) In a situation where the debtor is already out of the property and not interested in delaying foreclosure best to wait if possible till after title passes via the foreclosure thereby debtor's ownership interest in property terminated prior to bankruptcy along with any liabilities as property owner.
3) Other Scenarios:
A) Expecting parents may need to wait for the birth of their child to increase their household size to bring their income below the household median to avoid the means test. There also are the increased expenses of a new born baby that in some cases will eliminate any problematic excess monthly income to qualify for Chapter 7 filing.
B) Debtor needs to file asap. These situations include where the debtor has:
i) Pending Wage execution they want to stop;
ii) Pending Bank execution they want to reverse:
iii) Pending judgment they want to avoid;
iv) Future income increase means test issue;
v) Need emergency filing to stop auction/law day;and
vi) Been worn down by creditor harassment
The above scenarios are just some of the examples I can provide as to appropriate bankruptcy timing. One of my next posts will deal with debtors and divorce including timing and filing issues that are unique to couples at all stages of the divorce process.