Is There a Right Time to File for Bankruptcy in Arizona?

A question I often encounter from my Tucson and Phoenix clients is if there is a right time to file for bankruptcy.  Bankruptcy can help eliminate many types of debt and provide immediate debt relief.  However, many Arizona residents going through financial struggles view bankruptcy as the last resort and try to delay filing for bankruptcy at the cost of worsening their financial situation and making post-bankruptcy recovery much more difficult.  On the other hand, there are some who want to turn to bankruptcy at the first sign of financial trouble, when these problems could be addressed much more cost-effectively outside of bankruptcy.  And in yet other situations, bankruptcy may be warranted, but it would be more beneficial to delay filing bankruptcy to maximize its benefits.  In this article, I will go through several questions that will help you determine when to file for bankruptcy.

How do I know if I need a bankruptcy?

Determining whether bankruptcy is the right option for dealing with your financial difficulties is the very first step.  Every person’s situation will be slightly different, but in general there are several circumstances that suggest that bankruptcy would be beneficial.

The most obvious is if you are using credit cards to pay your monthly expenses on a regular basis, and cannot pay off your credit card balance at the end of the month.  When your expenses regularly exceed your income, the long-term solution is to either increase your income or reduce your expenses.  But the debt that you accrued in the meantime, especially if it is $10,000 or more, is most easily dealt with through bankruptcy.

If you have outstanding debt, and have tried negotiating with your creditors, but your creditors are not willing to provide an affordable repayment plan, then bankruptcy may be the only practical alternative to deal with your debt.

If you have many creditors (i.e. more than 5), then bankruptcy is likely a much more efficient way to deal with all of your creditors and debts at once.  Negotiating a settlement with each creditor is possible, but usually not practical, because even if only one of the creditors refuses to agree to an acceptable payment plan, you may end up having to file for bankruptcy anyway.

Another common situation where bankruptcy can help is when you are being threatened with a garnishment of your wages or bank accounts, or are in danger of losing property through foreclosure or repossession.  In these situations, bankruptcy is often the only way to stop the garnishment or foreclosure.  A Chapter 7 bankruptcy is usually sufficient to stop a garnishment.  Chapter 13 bankruptcy is particularly effective in stopping foreclosures and repossessions and allowing you to catch up on missed payments.  Chapter 13 bankruptcy can also be used to stop a garnishment.

In what situations should I not file for bankruptcy?

There are some situations when bankruptcy is not the best option.  The most common of these is when your debt is very low, and you have one or a few creditors.  Generally, when your debt is under $5,000, bankruptcy is probably not the best option.  This is because most debts can be reduced through negotiation, and therefore the benefit of bankruptcy will be minimal when compared to what would have to be paid to settle the debt outside of bankruptcy.  Because bankruptcy can only be filed once every several years (5 to 8 years, depending on the bankruptcy), it is generally better to retain the ability to file for bankruptcy to deal with more significant debt.  There are some exceptions to this, such as when there are many small creditor to deal with, and bankruptcy would streamline a very time-consuming process of dealing with each creditor individually.

There are also situation when a particular type of bankruptcy would not be beneficial.  For example, if you have significant non-exempt property, Chapter 7 bankruptcy is likely not the right option.  However, you can do a Chapter 13 bankruptcy instead.

When should I delay filing for bankruptcy?

There are some circumstances when your financial situation warrants a bankruptcy, but it is nevertheless beneficial to wait until a later time to file.  These circumstances can be broken down into three categories.

The first category is when you expect to incur additional unavoidable debt.  This is most common for people undergoing medical treatment.  In such circumstances, you want to make sure that you have a full picture of all your debts before filing for bankruptcy, and that you do not inadvertently make a debt non-dischargeable by filing prematurely.  Please note that this does not mean that you should incur additional debt just because you have decided to file for bankruptcy—in fact, doing so can lead to significant adverse consequences, such as denial of the discharge of the particular debt, or denial of the bankruptcy discharge overall.

The second category is when there is a required waiting period before a debt becomes dischargeable.  This is most common with income taxes.  For example, income taxes can become dischargeable if they are at least three years old, and if the tax return was filed at least two years before bankruptcy.  But, if the bankruptcy is filed before these waiting periods expire, then the taxes cannot be discharged.  In such situations, it is therefore important not to file for bankruptcy prematurely.

The third category of situations in which you may want to wait to file for bankruptcy has to do with various other waiting periods established by the Bankruptcy Code.  For example, if a bankruptcy is filed prematurely, certain payments you make before bankruptcy, including payments to friends or relatives, can be undone.  Similarly, certain property that you own may be declared non-exempt depending on how much time has passed between the time you acquired the property and the time you file for bankruptcy.  It is best to consult with an experienced bankruptcy attorney to determine if delaying the filing of the bankruptcy for any of these reasons would be beneficial.

Get assistance with the timing of your bankruptcy from an Arizona bankruptcy law specialist

 Yusufov Law Firm regularly advises clients on the best time to file their Arizona bankruptcy. If you are considering bankruptcy and would like to discuss your options, please contact us online, or call 480-788-0098 in Phoenix/Mesa or 520-745-4429 in the Tucson area. Consultations are free with no obligation.