Should You File Bankruptcy Before The Holidays?

The holiday season brings with it thoughts of food, family, and -- for a lot of people -- the specter of large credit card bills. If you're already struggling with your debts and considering bankruptcy, you may be waiting until after Christmas and New Year's Day to file.

Here's why that could be a very bad idea.

You could rack up debts that can't be discharged.

Any new debts that you incur 90 days prior to the date you file for bankruptcy are likely to be heavily scrutinized by the bankruptcy court and they may be declared non-dischargeable unless they were necessities like food. 

This could put you in the uncomfortable position of having to justify every purchase you made during the holiday season -- and paying off the debt even when your bankruptcy is over. The trustee could oblige you to repay the debt before your bankruptcy is even discharged, which could leave you in financial limbo longer than necessary.

Holiday bonuses could throw you over the means test.

You have to pass something known as the "means test" in order to file for a Chapter 7 bankruptcy, which is the kind of bankruptcy that allows you to write off all or most of your debts. If you don't meet the income limits of the means test, you'll be obligated to file for Chapter 13, which requires you to repay your debts through a payment plan that lasts 3 to 5 years.

The court will examine all of your income in the 6 months immediately prior to the filing date of your bankruptcy petition. If you typically receive a year-end bonus that's significant, or you expect to receive one this year, that could put you over the means test.

Cash gifts could also be a big problem.

Your income from work isn't the only thing that could throw you over the limit. The court considers all your income during that six month period -- including gifts from relatives. If, for example, your parents are disbursing part of your inheritance to you early each year through cash gifts (which is a common way of lowering the value of an estate so that it can avoid probate), that cash gift would be counted as part of your 6-month income.

There are some equally good reasons that some people do wait until after the first of the new year to file for bankruptcy. Chief among them are issues with back-due taxes. However, the vast majority of people are usually better off not waiting to file their petition. For more information that's specific to your situation, talk to a bankruptcy lawyer today, such as Todaro David M Co LPA .