Another factor to consider in deciding on a course of action is the timing of the petition. Even after the debtor decides that a bankruptcy should be filed, it is sometimes advisable to wait before filing.
In some cases, a debtor has no choice but to file immediately. Prompt action may be necessary to forestall a repossession, eviction, execution sale or utility shutoff. It may also be the only way to stay a state court proceeding and thereby avoid much unnecessary litigation. Another reason for a quick bankruptcy is an expectation of soon acquiring nonexempt property. Such property does not usually become part of the estate after filing. (An entitlement to receive property in the future usually does become property of the estate, however.) In all of these cases, a bankruptcy can be filed almost instantaneously, if necessary, under the current rules.
Effects of prebankruptcy transfers or other actions
One of the prime reasons for a delay in filing stems from the possible effects, both negative and positive, of prebankruptcy transfers of property. Transfers that have already been made may dictate a delay in filing, or it may be advisable to make other transfers before filing to gain maximum advantage from the case.
If the debtor, with intent to hinder, delay or defraud creditors, has transferred, removed, destroyed, mutilated or concealed his or her property within one year before filing a bankruptcy petition, a successful objection to a Chapter 7 discharge may be brought. This definition may include the transfer of specific property subject to a security interest in favor of a creditor, but only if the requisite intent existed.
If it seems likely that such an objection will be raised, it may be prudent to delay filing a Chapter 7 case, if possible, until a year has passed since the transfer. Even then, a trustee may still seek to recover a fraudulent transfer, and a secured creditor may still claim willful and malicious conversion of the collateral but only to seek an exception to the discharge of that creditor’s claim in a Chapter 7 case.
Large prebankrutpcy transfers to creditors
An avoidable preference can be defined as a transfer of property worth more than $600 from an insolvent debtor to a creditor to pay a prior debt if the transfer allows the creditor to receive more than it would otherwise receive in a Chapter 7 liquidation case. The transfer must have been made within 90 days before filing (or one year before filing if the creditor is an “insider,” a relative or close associate of the debtor).
Thus, large payments to some creditors before bankruptcy may be undone by the trustee if made within the stated time periods. If this is a concern–for example, if the payment was made to a friend or relative–it may be better to delay filing until after the applicable preference period has passed. It should be stressed that there is nothing improper or illegal about making a preferential payment. The only possible negative consequence is avoidance, or reversal, of the transfer by the trustee.
Giving away property before a bankruptcy
A fraudulent transfer of property may also be set aside by the trustee. A fraudulent transfer is a transfer or obligation made within one year before filing, either (1) for the purpose of hindering, defrauding or delaying creditors or (2) for which the debtor did not receive reasonably equivalent value at a time when the debtor was insolvent or was about to incur debts beyond his or her ability to pay.
In addition, a transfer that can be set aside under a state fraudulent transfer or fraudulent conveyance statute can usually be set aside by the trustee at any time within the period allowed by that statute (usually longer than one year). Generally, these provisions prevent a debtor from giving away property to shield it from creditors. This may be of no concern to the debtor, but if it is, it may be advisable to wait, if possible, before filing.
The debtor’s right to set aside transfers
On the other hand, some preferences and fraudulent conveyances may be set aside by the debtor within the same time periods allowed the trustee. If the transfer was involuntary, the debtor did not conceal the property and the debtor could have exempted the property involved, then the debtor may set aside the transfer. If the debtor plans to make use of this power, it may be crucial to file the petition before the time period runs out.