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Best Time to File for Bankruptcy?

We are all about partnerships at Momentum. We know that we cannot do everything and that many of the people in our community have knowledge and expertise that we can learn from. It is in the spirit of learning from our community members that we present the following blog post from guest blogger Douglas Hoyes, Founder & Trustee of Hoyes, Michalos & Associates.
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Making the decision to file bankruptcy isn’t easy, and it may seem as if there’s never an ideal time to begin the process. But believe it or not, your choice of timing could mean saving—or losing—thousands of dollars.
There is a definite seasonality to bankruptcy in Canada, with quieter periods happening around the holidays and summer months, and spikes in the spring and fall.
Much of this has to do with our lifestyles. In December, we’re busy celebrating the holidays with our families, and we push financial concerns to the bottom of our to-do lists. After making our new year’s resolutions, we’re more likely to take action in February, March, or April.
Likewise, in the summer, we’re focused on relaxing and enjoying time off. Our debts and credit card bills take a back seat to backyard barbecues and summer vacations with our families.
But if we dig a bit deeper, we see that there are also some very practical reasons why insolvencies follow this month-to-month pattern — and it has a lot to do with taxes.

Bankruptcy and Tax Refunds

Here’s something many people don’t realize: You will not receive a tax refund (if there is one) for the year that you file bankruptcy. This means that if you file bankruptcy in 2015, you will lose your tax refund for the tax year 2015. This money will go toward your bankruptcy estate.
While you can’t avoid losing one refund, you can avoid losing multiple refunds if you time your bankruptcy appropriately.
January and February are among the worst months to declare bankruptcy if you are expecting a refund because you likely will not have filed taxes for the previous year yet. If you file bankruptcy during this time, the refund will immediately go to the bankruptcy estate along with your refund next spring. Essentially, the refund for 2015 will be lost because it’s automatically included in your bankruptcy, and the refund for 2014 will be lost because it’s considered outstanding.
A better option is to wait to declare bankruptcy until after your tax returns have been filed and you’ve received your refund. That way, you only lose one refund.

The Importance of Assets

Besides your tax schedule, you may want to consider any assets that you’ve recently sold, transferred, or disposed of as well as money you’ve borrowed and big payments you’ve made to creditors. These are all transactions that your trustee will be obligated to investigate. Before making any big financial moves, talk with your trustee to help determine the best time to file and whether other debt-relief options may in fact be more appropriate.

When to Disregard Timing

As much as we’d all like to time our bankruptcies to fit in with our lives as conveniently as possible, sometimes that simply isn’t an option. Often, this comes down to how deeply in debt you are and what your relationship with your creditors is like. If you’re at the point where you’re getting constant phone calls from creditors and they’re threatening legal action like a wage garnishment, you will need to file bankruptcy as soon as possible in order to put a halt to these activities.
Still not sure when to file? A quick chat with a trustee should help you figure it out. Everyone’s situation is a little bit unique, and it’s always a good idea to confer with a professional to get a second opinion.

About the Author

Doug Hoyes has extensive experience resolving financial issues for Canadian citizens. A Licensed Bankruptcy Trustee and co-founder of Hoyes, Michalos & Associates, he is also a Chartered Professional Accountant (CPA), Chartered Insolvency and Restructuring Professional and Business Valuator. He regularly comments on a variety of TV, radio and other media outlets on topics surrounding bankruptcy and writes a column for the Huffington Post. Hoyes has been a Licensed Trustee since 1995 and has testified before the Canadian Senate’s Banking, Trade and Commerce Committee in 2008.

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