The holidays can be a stressful time of year for anyone, but it is especially stressful for those struggling financially. If your debts are too much to bear and you are considering bankruptcy, it can be hard to decide when is the best time to file. Should you file before the holidays to eliminate your anxieties, or is it the best plan to focus on enjoying the holiday season and figure out your finances in the new year? Every bankruptcy case is unique and the answer to this question will depend on the specifics of your situation.
Can Holiday Debt be Discharged?
In bankruptcy law, all the debt accumulated in the three months before and after Christmas is generally considered non-dischargeable debt. In other words, any money you spend on gifts, decorations, holiday parties, or travel during the holiday season is your responsibility to pay and cannot be eliminated through bankruptcy. With this kind of debt there are two options. The first option is to reaffirm this debt, which would allow you to make monthly payments until the debt is paid off. The second option is to redeem the debt, or pay the full balance. The exception to this rule is if the cause of the debt was an absolute necessity. In the case of necessary debt, even if it is accrued during the period of time surrounding the holidays, can be discharged during bankruptcy.
When trying to determine if you should file before or after the holidays, the best way to decide what to do is to take the means test. The means test
is a set of steps you can use to determine if you should file for Chapter 7 or Chapter 13. Chapter 7 bankruptcy allows you to discharge many or all of your debts, while Chapter 13 bankruptcy, sets up a manageable monthly debt re-payment plan over a period of 3 to 5 years. One of the important areas of the means test is how much income you received in the six months prior to filing. If your income is above a certain threshold, you will not be able to file for Chapter 7 bankruptcy and will therefore be held responsible for more of your debts.
You will need to know precisely how much income you receive in the six months prior to filing - this include all incoming funds
like child support, lottery winnings, inheritance money
, survivor's benefits and holiday bonuses. If you know you will be receiving a holiday bonus, it may be a good idea to file before you receive this extra income. If you file before you receive the bonus, it can raise your income and make you ineligible for Chapter 7 bankruptcy.
Your income taxes can also impact your filing status. In Chapter 7 bankruptcy, debtors typically have what is known as a “no asset” bankruptcy. This means that what you own is either exempt or worth too little to be sold off to help pay for your debts. Under no asset Chapter 7, if you file after January 1, the IRS will not be paid from the bankruptcy proceedings. This does not mean debt owed to the IRS is forgiven, but instead that you will have to agree to a payment plan to pay off any income tax owed.
If you do own any valuable assets when you file for Chapter 7 bankruptcy, any non-exempt item that meets the valuation criteria will be liquidated to pay your creditors. The IRS, as a priority debt, will receive payment before your other creditors.
Chapter 13 bankruptcy presents three significant benefits to filing for bankruptcy after
your income taxes are due.
- You will be protected from the IRS while you are repaying your debts.
- Because there is a decent amount of flexibility for repayment, you can choose to pay debts in order of priority.
- No interest or penalties will accrue during your bankruptcy case. If you want to take advantage of these benefits under Chapter 13 bankruptcy, you should wait to file in the New Year.
The holidays are a time to enjoy family, friends, and cherished traditions. If financial stress is keeping you from enjoying the holiday season, don’t suffer alone. Veitengruber Law
can help you determine when and how to file for bankruptcy. Our legal team is experienced in bankruptcy law and debt management. We can answer any of your questions and help you decide which option is best for your specific situation, and we will be by your side throughout your entire bankruptcy case.