When Not to File Bankruptcy

Bankruptcy is a powerful remedy, and it is the right one for many New Yorkers. It is not the right one for everyone. A Chapter 7 discharge can only be used once every eight years, the filing appears on your credit report for up to ten years, and a poorly timed case can expose property or family members to claims that would otherwise have stayed dormant. Half of our job as bankruptcy counsel is telling people when to file. The other half is telling people when not to.

Below are the most common situations in which we advise New York City residents to hold off on filing, or to skip bankruptcy entirely.

You May Be Judgment-Proof

A creditor with a judgment can only collect from income and assets that New York law lets it reach. If everything you have is exempt from collection, a lawsuit against you produces a piece of paper and nothing more. Lawyers call this being judgment-proof, and many New Yorkers on fixed incomes qualify without realizing it.

• Exempt income: Social Security, SSI, and SSDI benefits cannot be garnished for consumer debt under 42 U.S.C. § 407. CPLR 5205(d) exempts most public and private pension payments, unemployment benefits, public assistance, and workers' compensation.
• Wage garnishment limits: Under CPLR 5231, a judgment creditor may take no more than 10 percent of gross wages, and may take nothing at all if your weekly disposable earnings fall below 30 times the applicable minimum hourly wage. At the current $16.50 city minimum, that floor is $495 per week in disposable earnings.
• Bank account protection: The Exempt Income Protection Act, CPLR 5222-a, automatically shields a baseline amount in your bank account from restraint, calculated at 240 times the minimum hourly wage, with greater protection where exempt benefits were direct-deposited within the prior 45 days.

A worked example: a Bronx retiree receives $1,950 per month in Social Security and has $2,800 in checking. A credit card company sues her and wins a $14,000 judgment. It cannot garnish her benefits, it cannot restrain the protected balance in her account, and she owns no real property. Filing Chapter 7 would cost her attorney fees and a court filing fee to stop collection that could never happen. For clients in this position, a letter to the creditor identifying the exempt income often ends the matter. Residents of public housing should also read our page on bankruptcy for NYCHA residents, since tenancy questions and collection questions often travel together.

Your Main Debts Would Survive the Discharge

Bankruptcy discharges most unsecured consumer debt, but 11 U.S.C. § 523(a) lists categories that pass through the case untouched. If the debts driving you to file sit on that list, the filing accomplishes little.

• Domestic support: Child support and spousal maintenance are never discharged. 11 U.S.C. § 523(a)(5).
• Recent income taxes: Income tax is dischargeable only if the return was due more than three years before filing, the return was actually filed at least two years before, and the tax was assessed at least 240 days before. 11 U.S.C. §§ 523(a)(1), 507(a)(8). Taxes outside those windows survive, as do all trust fund taxes. The timing rules are explained in detail on our page about New York State and City tax debt in bankruptcy.
• Student loans: Discharged only on a showing of undue hardship under § 523(a)(8), judged in this circuit under the Brunner standard, which requires proof that you cannot maintain a minimal standard of living while repaying, that the condition will persist, and that you made good faith efforts to repay.
• Fraud, theft, and willful injury debts: Sections 523(a)(2), (4), and (6) preserve debts obtained by false pretenses, embezzlement, or intentional harm, though the creditor must sue within the bankruptcy case to establish this.
• Most government fines and penalties: Including criminal restitution and many municipal penalties. § 523(a)(7).

If 80 percent of your debt is child support arrears and recent tax, a Chapter 7 discharge of the remaining 20 percent may not justify spending your once-in-eight-years filing. A Chapter 13 repayment plan sometimes helps with these debts even where Chapter 7 does not, so the analysis depends on the mix.

You Would Not Pass the Means Test

Chapter 7 is means-tested under 11 U.S.C. § 707(b). If your household income over the six months before filing exceeds the New York median for your household size, you complete a detailed expense calculation, and if it shows meaningful ability to repay, the court can dismiss your Chapter 7 or convert it to Chapter 13. A two-earner household in Queens with steady salaries frequently fails the test even while drowning in minimum payments. Filing anyway invites a motion from the United States Trustee and months of litigation. Run the numbers first. Our page on the NYC bankruptcy means test walks through the calculation, the median income figures, and the city-specific expense allowances that often change the result.

You Own Property the Trustee Could Sell

In Chapter 7, a trustee may sell any asset you cannot cover with an exemption and distribute the proceeds to creditors. New York's exemptions are generous but finite:

• Homestead: CPLR 5206(a) protects equity in your principal residence, including shares in a cooperative apartment corporation. The protected amount for property in the five boroughs currently exceeds $200,000 per owner and is adjusted for inflation every three years. Equity above the cap is fair game.
• Other property: Vehicles, cash, and personal property are protected only up to the dollar limits in CPLR 5205 and Debtor and Creditor Law §§ 282 and 283, or under the federal scheme in 11 U.S.C. § 522(d), whichever set you elect.

Consider a Brooklyn homeowner with $450,000 of equity in a two-family house and $60,000 of credit card debt. Filing Chapter 7 hands a trustee several hundred thousand dollars of non-exempt equity to reach $60,000 of claims. A negotiated settlement, a refinance, or a Chapter 13 plan that pays the cards over five years while keeping the house would each beat that outcome. Before any filing, review our pages on bankruptcy exemptions and, if you own an apartment, on co-op apartments in bankruptcy, because board transfer restrictions add a second layer of risk for co-op shareholders.

You Recently Repaid Family, Moved Assets, or Ran Up Charges

The Bankruptcy Code looks backward from the filing date, and certain recent transactions create problems that waiting would avoid.

• Preferences: Under 11 U.S.C. § 547(b), the trustee can recover payments to ordinary creditors made within 90 days before filing, and payments to insiders, including relatives, made within one year. If you repaid your brother $6,000 eight months ago, filing now means the trustee can sue your brother for that $6,000. Wait out the year and the claim disappears.
• Fraudulent and voidable transfers: Section 548 lets the trustee unwind transfers made for less than fair value within two years, and New York's Debtor and Creditor Law Article 10 extends the reach-back further for transfers made while insolvent. Signing your car over to a cousin before filing is the classic mistake.
• Recent charges: Section 523(a)(2)(C) presumes fraud for luxury purchases above a set dollar threshold made within 90 days of filing, and for cash advances above a separate threshold within 70 days. Charging a vacation and filing the next month invites an objection to discharge of that debt.

None of these makes bankruptcy impossible. They make timing decisive. Disclosure is mandatory in every case, so the answer is never to hide the transaction; it is to file when the look-back windows have closed.

You Received a Discharge Too Recently

Section 727(a)(8) bars a Chapter 7 discharge if you received one in a case filed within the previous eight years, measured filing date to filing date. Section 1328(f) imposes shorter waiting periods for Chapter 13 discharges: four years after a prior Chapter 7 and two years after a prior Chapter 13. Filing a Chapter 7 in year seven gets you all the burdens of bankruptcy and no discharge. If you filed in 2019 and are struggling again, the calendar, not the courthouse, may be your first constraint.

The Statute of Limitations Has Nearly Run

New York's Consumer Credit Fairness Act shortened the limitations period for consumer credit actions to three years. CPLR 214-i. For these debts, a partial payment or written acknowledgment no longer restarts the clock. If your credit card default is two years and nine months old and the creditor has not sued, filing bankruptcy now spends your discharge on a claim that will be time-barred in three months. Older non-consumer contract debts remain governed by the six-year period in CPLR 213(2). We routinely pull the default dates from account records before recommending a filing, because a debt the creditor can no longer sue on rarely justifies one.

A Co-Signer Would Be Left Holding the Debt

Your Chapter 7 discharge protects you alone. If your mother co-signed your car loan or a relative guaranteed your lease, the creditor may pursue the co-signer for the full balance the moment your case is filed. Chapter 13 offers a co-debtor stay for consumer debts under 11 U.S.C. § 1301 while your plan pays the claim, which is one reason a debtor who could file Chapter 7 sometimes chooses Chapter 13 instead. If protecting a co-signer matters more to you than a fast discharge, that preference should drive the strategy.

More Debt Is Coming

Bankruptcy discharges debts that exist on the filing date. Debts incurred afterward survive in full. A client facing surgery without insurance, an ongoing lawsuit that has not yet produced a judgment, or a business still generating losses should usually wait until the damage is complete, then discharge everything at once. Filing mid-crisis wastes the discharge on half the problem. The exception is a genuine emergency, such as a foreclosure sale or eviction scheduled this week, where a same-day skeleton petition can stop the clock while the larger strategy is worked out.

Getting the Timing Decision Right

Deciding against bankruptcy is not the same as doing nothing. The alternatives include negotiated settlements, exemption planning, defending the collection lawsuit on the merits, disputing the debt under consumer protection statutes, and simply waiting for a look-back period or limitations period to expire. Each of these carries its own deadlines. A consultation that ends with the advice not to file is still a consultation worth having, because the reasons behind that advice tell you what to do instead.

You can contact the Law Offices of Albert Goodwin by phone at 212-233-1233 or by email at [email protected].