If you're experiencing serious financial trouble, the closer it gets to the end of 2016, the more you should seriously consider filing bankruptcy before the holiday season starts. While a lot of people put the process off, figuring that they don't want to ruin their holiday by going through bankruptcy court, waiting until after December 31 could be a very bad idea that ends up complicating your situation. This is why.
1.) You could fail the means test.
There are essentially two types of personal bankruptcy—Chapter 7, which allows you total forgiveness of any dischargeable debts, and Chapter 13, which requires you to enter into a repayment program for the majority of your debts that lasts between 3-5 years. Most people prefer to file Chapter 7, for obvious reasons. The impact to their credit is no more severe, and they get a fresh start much sooner.
However, to qualify for Chapter 7, you have to pass what is called the "means" test. That compares your average monthly income for the 6 months prior to the date you file for bankruptcy against the median income for households of the same size in your state. The timing of this test could be crucial because of what can be counted as part of your average monthly income:
- holiday bonuses that are given out by the boss
- profit-sharing bonuses that are paid at the end of the year
- extra work that you picked up from a second job to pay for gifts
- performance-related bonuses that are done at the end of the year
- gifts from relatives (like your parents) that were intended to help you over the holidays
If you wait until January of next year to file for bankruptcy, you could be pushed over the applicable limit for your state and forced to file Chapter 13 instead of Chapter 7.
2. The debt you accrue during the holiday season might not be dischargeable.
Most bankruptcies go off without a hitch, and there's very little for a trustee to be suspicious about—except when there's a sudden new burst of spending and a pile of debts that accrue right before the bankruptcy gets filed. It isn't uncommon for people who realize that they're heading for a bankruptcy to develop a devil-may-care attitude about their finances in the last month or so before they finally file. Combine the resignation that bankruptcy seems to be inevitable and the inclination to overspend, particularly at the holidays, and it isn't uncommon for people to run up significant new debts.
Those new debts might not be dischargeable and could end up throwing your bankruptcy into doubt. Any charges that total $550 or more on any one credit card in the 90 days prior to your bankruptcy can be considered fraud—the court can determine that you made the charges knowing full well that you were going to file bankruptcy and never intended to pay the bills at all. Cash advances of $825 or more are also treated the same way.
In other words, your ticket home to see your folks for the holidays could be enough to get your bankruptcy tanked—so could the combination of small gifts that you picked up for your brothers and sisters. In some cases, the trustee may simply exclude your recent purchases and make you repay those debts—in other cases, he or she could dismiss your entire bankruptcy based on the fraud.
It's time to be realistic about your financial situation. If bankruptcy seems like it is simply inevitable, don't push it off until after the holidays. If you address it now, you avoid potential complications and could start the new year with a clean slate.