When Should I File for Bankruptcy?

Many bankruptcy clients come into our office weighed down by the burden of their debt. It is not uncommon for the client to come in with the notion that bankruptcy should be filed immediately so that he or she can discharge the burdensome debt as soon as possible. However, it is very important to know that there is a lot of strategy involved in the timing for filing for bankruptcy. It is very important to do what is called pre-bankruptcy planning. This planning can take anywhere from a few days to a few months.

Last week we were at creditor hearings (341 creditor meetings) and we always sit close to the front to hear other attorneys and see how they like to handle these meetings. At one point, there was a gentleman filing for bankruptcy who had thousands of dollars worth of tools. The law allows a debtor to exempt (prevent the trustee from taking) a certain amount of “tools of the trade.” This particular debtor used these tools to help his brother at various job sites a few days a week. However, the debtor did not receive any income. The tools of the trade exemption requires that the debtor receive income from the use of the tools. The bankruptcy trustee asked the debtor how much income he received from using his tools and his response was, “none, I work for free to help out my brother.” The result is that the bankruptcy court took and sold all of his tools.

HERE IS WHAT SHOULD HAVE HAPPENED: The attorney should have told the debtor not to file bankruptcy yet. The better option was to have the debtor continue to work for his brother, but let the brother know that he needed to receive some sort of income in return. The debtor would begin this new arrangement with his brother, making as little as $10-20 a day. The debtor would then be allowed to use the exemption and keep his tools worth thousands of dollars. This is neither illegal nor unethical. In fact, it is encouraged to help debtors get a fresh start and make money to support themselves where they can.

We consider pre-bankruptcy planning THE MOST IMPORTANT PART OF BANKRUPTCY FILING. It can be used to keep your car and home as long as possible. Good planning maximizes the amount of money you keep, and minimizes what you forfeit to your creditors. Do not rush into filing for bankruptcy. Make a plan that will maximize the amount of property you keep.