Hurry or Wait? Motivations for Quick Bankruptcy Filings

While many people can benefit from bankruptcy relief, there is no doubt that filing for bankruptcy is a major decision for a person to make. Intuition would suggest that once the decision is made to file, the best course would be to move quickly and purposefully to complete the filing. However, this is not always the case. Indeed, the timing of filing a bankruptcy case can be a complex decision. Some facts and legal rules call for moving quickly to file, while other facts and rules favor waiting before filing. Deciding how to balance these competing concerns is one area that the counsel of a knowledgable bankruptcy attorney is of particular benefit. In this two-part post (see also part two), I describe a few considerations that lead to expediting or delaying a bankruptcy filing.

Filing Bankruptcy Quickly

While I don't have empirical data on the subject, I expect that the majority of true emergency bankruptcy filings done on a short clock relate to prevention of foreclosure. As the term is generally used, an emergency filing contains only the bare minimum amount of documents required to commence a case, with many of the detailed schedules filed several days later. As the automatic stay halts a foreclosure sale, the filing of a bankruptcy provides time and the prospect of proposing a chapter 13 plan to catch up the mortgage. In some cases, a bankruptcy might be filed shortly after a foreclosure sale to take advantage of post-sale rights to redeem and keep a property.

1. Expiring Rights

The most critical of timing issues suggesting quick bankruptcy action are pending events or ending time periods that effect a permanent change on the prospective debtor's rights. Issues dealing with seizure and sale of collateral are at the forefront of this category, including foreclosure sales and sale following repossession. An expiring statute of limitations would be a similar issue.

Occasionally, a debtor might intend to avoid an involuntary transfer of exempt property, such as certain garnishments. The particular situations where this is an option are beyond the scope of this post, but the bankruptcy code provides fixed windows of time prior to the filing of a petition where this option could be pursued.

2. Creditor Activity that Adds Cost or Complexity

Some things that a creditor does in attempt to collect a debt have no end impact on the bankruptcy. For example, if a bankruptcy would pay 0% to credit cards, additional late fees on the credit accounts may prove of no consequence in an ordinary case. On the other hand, if the bankruptcy would pay a claim in full or leave a claim not discharged, it may make sense to move quickly to prevent the creditor from running up costs and collections charges. Similarly, preventing a credible threat of repossession is simpler and less risky than filing to intervene in a repossession.

3. Unfavorably Changing Facts

A large number of individual facts influence the course of a bankruptcy case. Sometimes, these facts are changing in a way unfavorable to a future bankruptcy case. For example, in several contexts, bankruptcy debtors are better off with a lower property value. Therefore, if market prices are increasing quickly, it might make sense to file quickly in hopes to minimize value. Furthermore, several aspects of the means test are determined by the facts as they stand on the date of filing. However, items like expected changes in income or household dependents must generally be disclosed and can be accounted for in the bankruptcy process, reducing the importance of this timing consideration. Unsurprisingly, facts cut both ways, and is often also a reason to delay a filing, as discussed in part two of this post.

While I have not listed a great many reasons for filing a bankruptcy quickly, when these factors are present, they may provide significant pressure to move quickly.

Part 2 of this post concludes by discussing the several reasons why people wait before filing bankruptcy. While reasons to file quickly may be apparent to all involved, some reasons for waiting are dependent on technical rules and not obvious.