The busy holiday season can be a stressful time, but the added burden of bankruptcy can be almost too much to bear. So, what is the solution? Is it better to file before Christmas to remove the worries, or should one just put aside all thoughts of financial woes and just enjoy the holiday season? The answer to these questions depends on several factors.
Bankruptcy law states that any debts incurred within 3 months before or after Christmas are considered non-dischargeable debt. This means all the money spent on gifts and other holiday items are the responsibility of the one purchasing them, and these bills must be paid off. There are 2 options in this matter. The first is reaffirming the debt, which means making monthly payments until it is completely paid for. The second is redeeming the debt, which is paying the full balance all at once. The exception to this is any item deemed a necessity. These debts could be discharged when bankruptcy is filed.
Holiday Bonuses and the Means Test
The means test refers to a set of steps one must go through in order to decide whether to file for Chapter 7 bankruptcy, which would mean writing of many, or all, of the debts incurred in only a few months, or file for Chapter 13 bankruptcy, which requires reasonable payments over a matter of 3 to 5 years. One of the areas covered in the means test is the income received in the 6 months before filing for bankruptcy.
This does not just mean the amount received on regular paychecks. It includes money given for child support, lottery winnings, and even holiday bonuses. Because the income is decided based on the 6 calendar months before filing, it is a good idea to file before receiving the bonus. For instance, if the bonus comes on December 20 every year, filing in early December will not affect the bonus, because the 6 month calendar will run from June 1 to November 30.
Receiving Cash for Christmas
This falls under the same category as the holiday bonuses. If the money is received after bankruptcy is filed, it will not affect the means test, and will not factor in on the decision of whether to file for Chapter 7 or Chapter 13 bankruptcy. It is also better to file before these gifts are given because they may raise the amount of “income” earned in the 6 month period. If the income is too high, it may not be possible to apply for Chapter 7, so instead of writing off many of the debts, the debtor must file for Chapter 13, and be responsible for more repayments over a longer period of time.
Income Tax and Bankruptcy
There are 2 types of Chapter 7 bankruptcies. The first is “no asset”, which means that what is owned is either exempt, or worth too little to be sold to pay the debts. In this case, if bankruptcy is filed after January 1, even the IRS is not paid anything through the bankruptcy case. But this does not excuse the debt. Instead, arrangements will have to be made with the IRS to pay off the income tax owed. In an “asset” Chapter 7 bankruptcy, any item not exempt that is worth a fair price can be sold to pay off creditors. Because the IRS is considered a priority debt, they will receive payment before any other creditors. And though the debtor may lose property they valued and wished to keep, there will be one less debt to worry about once the bankruptcy case is complete.
In a Chapter 13 bankruptcy, there are 3 major benefits for filing after taxes have come due. The first is that you are protected from the IRS during the process of repayment. The second is that there is more flexibility for repayment, making it easier to pay off debts that are a higher priority. The third benefit is that there can be no interest or penalties added during the bankruptcy case. In these instances, filing after Christmas in the New Year is a better option.
These are just a few things to consider when filing for bankruptcy. If cash gifts or bonuses are anticipated, and income tax debt is not expected, filing before Christmas is most likely the best option. But if those situations are reversed, filing after the New Year celebration has ended may be in your best interest. Either way, if filing is definitely in the future, a chat with a bankruptcy attorney may clear up any concerns, and help to decide which option is the best for each individual case.