A bankruptcy covers the debts you owe as of the moment you file your case, not future debts. So how do you know when to file your case?
In last week’s blog post we introduced how to time your bankruptcy filing. We gave a list of 15 examples of timing considerations. Today we start with the first example: timing your bankruptcy filing so that it covers as many debts as possible.
Debts You Might Owe Very Soon
Here are two situations in which you expect to soon owe a debt that you don’t owe at the moment.
First, let’s say you have a medical condition for which you are about to see a doctor or other health professional. Or it’s an ongoing condition for which you get treatment regularly. Let’s assume that you know that you can’t afford to pay the upcoming medical bills for these upcoming services. You are already feeling overwhelmed by your present debts. You’re feeling pressure to file bankruptcy now to get relief from those debts. But you’re wondering if you should wait to file bankruptcy until after you’ve finished incurring the upcoming medical debts.
Or second, let’s say you’ve been relying on credit cards, cash advances and such to get by. You’re falling further and further behind, and you know the situation is not sustainable. You recognize that you’ll never be able to pay all your debts, so you need bankruptcy relief. But you don’t know when you should stop using the credit and file bankruptcy.
Here’s some guidance.
Bankruptcy Only Includes Existing Debts
Debts that you legally owe at the moment you file your bankruptcy are included in your bankruptcy case. Debts you don’t owe until after you file your bankruptcy are not included. That include debts you incur the next day. Or actually, even debts you incur an hour after your filing.
For example, usually 3 or 4 months after filing a Chapter 7 “straight bankruptcy” case you receive a discharge. That legally writes off most debts, including virtually all medical debts and unsecured credit card debts. But that only covers those medical and credit card (and other) debts legally owed at time of filing.
And in a Chapter 13 “adjustment of debts,” only the debt in existence at the time of filing are covered in the court-approved payment plan.
What Determines whether a Debt is Included
Under bankruptcy law, a debt is defined as a “liability on a claim.” Section 101(12) of the U.S. Bankruptcy Code. In other words, a debt is what you owe on a “claim.” And a “claim” is a “right to payment” that a creditor has against you. Section 101(5) of the Bankruptcy Code. Therefore, the issue is whether you and/or the creditor have acted to trigger a right of payment from you. If so, and that occurred before you file the bankruptcy case, the debt is included.
So, a medical provider has a right to payment from you immediately upon providing you the medical services. A credit card creditor has a right of payment from you immediately you’re your use of the card for a purchase or cash advance. Similar triggers create a debt with other types of debts.
What’s Not Required
Notice in the two above examples we said the right to payment exists “immediately upon” the triggering event. So the debt exists then as well. This does not require the creditor to send a bill, or for you to receive it.
Notice this also means that neither you nor the creditor needs to know the amount of the debt. For bankruptcy purposes it’s already a debt that can be included in your bankruptcy case. The amount can be worked out later.
The debt can also be “contingent.” You may not actually have to pay the debt yourself; that may depend on a separate event. For example, someone else may also be liable on a joint debt, or it may be covered by insurance. But it’s still a debt for bankruptcy purposes.
Also, you may not agree that you owe the debt. It can be “disputed.” It’s still a debt for bankruptcy purposes and thus included in your bankruptcy case. The creditor and you may resolve the dispute later, if necessary.
(See Section 101(5)(a) of the Bankruptcy Code.)
Trigger Event Not Always Obvious
With a medical or credit card debt it’s quite straightforward when the debt has been created. And that’s true of the majority of debts; it’s usually pretty obvious. For example, you become liable on a vehicle loan debt when you sign or otherwise legally enter into the loan agreement. Same when you buy furniture on a contract, or incur a payday loan.
But how about an annual federal or state income tax debt? What triggers that into a debt?
There’s a relatively simple answer on this: legalistically you owe the tax as of the end of that tax year. So as of January 1 of the following year you can include that tax in your bankruptcy case. (The effect of including it is a different question. The tax must meet certain conditions to discharge it under Chapter 7, for example. But if it doesn’t meet those conditions, you can pay it under the favorable conditions of Chapter 13.)
How about more complicated debts? How about a debt arising out of a divorce, such as an obligation to pay one of the marital debts? Or to pay child support? Do you have to wait (and not file your bankruptcy case) until the divorce is final? Or don’t some of those debts arise from the marriage itself so you can file bankruptcy earlier?
Or how about an apartment lease that you signed a while ago but want to get out of now? Is the triggering event when you signed the lease? Or is a new debt created every month you stay in the apartment? If it’s the latter then does that mean that you may still owe for the time you stay there past your bankruptcy filing date?
Similarly, on a condo foreclosure, would you continue owing homeowner association dues for the months after your bankruptcy filing? Does it matter that you’ve moved out if the condo is still in your name until the foreclosure is final?
In these and many other less straightforward situations the answers are not nearly so obvious. And the answers may be surprising and financially dangerous.
Such as in the last example. Generally you DO keep incurring each new month of homeowner dues. And you do so as long as the lender has not completed the foreclosure process. That could take many months, or in some circumstances even years. Those accruing dues would not usually be covered by a bankruptcy case you filed before those months/years of dues accrued.
So deciding when to file your case can get complicated fast.
The Best Advice is to Get Some Good Advice
Even in relatively clear situations—the above medical, credit card, and income tax ones—there are delicate bankruptcy timing issues.
If you’re anticipating many months (or even years) of medical procedures, should you wait until they’re done? What if you’re being sued/foreclosed/repossessed and don’t feel you can wait?
When does it make sense to wait to the end of a calendar year to include that tax debt in your Chapter 13 case? Are there other alternatives such as a partial-year tax filing?
The timing issues get even more complicated in the other less-straightforward examples we gave, and in countless others.
The honest truth is that the timing solution will always depend on your unique situation. It’s actually true: you are unique, your combination of circumstances is unique, and your timing solution must be unique.
It’s the job of your bankruptcy lawyer to understand you and your situation. He or she is trained and experienced about your legal options, timing and otherwise. He or she has spent a career wrestling through tough situations like yours. You’ll learn about your timing options, the advantages and disadvantages of each, and likely get a recommendation about what’s best.