When is the best time to file a chapter 7 case?

The answer depends on the status of the person’s dischargeable debts, the nature and status of the person’s nonexempt assets, and the actions taken or threatened to be taken by creditors.  The following rules should be followed:

  1. Don’t file the case until all anticipated debts have been incurred, because only debts that have been incurred when the case is filed are dischargeable and it will be another eight years before the person is again eligible for a chapter 7 discharge.  For example, a person who has incurred substantial medical expenses should not file a chapter 7 case until the illness or injury has been either cured or covered by insurance, as it will do little good to discharge, say, $100,000 of medical debts now and then incur another $100,000 in medical debts after the case has been filed.
  2. Don’t file the case until the person filing has received all nonexempt assets to which he or she may be entitled.  If the person is entitled to receive an income tax refund or a similar nonexempt asset in the near future, the case should not be filed until after the refund or asset has been received and disposed of.  Otherwise, the refund or asset will have to be turned over to the trustee.
  3. Don’t file the case if the person filing expects to acquire nonexempt property through inheritance, life insurance or divorce in the next 180 days, because the property may have to be turned over to the trustee.
  4. If an aggressive creditor has threatened to attach or garnish a person’s assets or income, the case should be filed immediately to take advantage of the automatic stay that accompanies the filing of a chapter 7 case (see Question 18, below).  If a creditor has threatened to attach or garnish the person’s wages or if a foreclosure action has been filed against his or her home, it may be necessary to file the case immediately in order to protect the person’s interest in the property.