Bankruptcy and the Holidays: Reasons to File BEFORE the End of 2014

There may be very tangible benefits to seeing an attorney about bankrutpcy now instead of waiting until after December 31.

If you have serious debt problem, you are probably doing your best during the holiday season to work around it. Understandably you don’t want to think too much about it. Life’s even more hectic than usual this time of year. It’s hard to find the time to get the holiday stuff done as it is, much less find the time and attention to focus on what you should do about your debts. Or to find the time and attention to go see an attorney to get advice about your legal options.

But it may be well worth your while to find that time and attention. Here are two related reasons why. They both have to do with timing.

Being Proactive about Timing Rules

Bankruptcy is full of timing rules. Applying some of those rules to your own unique circumstances may well give you some advantages if you filed a bankruptcy case sooner (or avoid disadvantages if you filed later). In some situations you may get seriously harmed if you delay. But unless you get legal advice you wouldn’t know and be able to take advantage of the law. And getting that advice sooner rather than later can make a huge difference.

The Quirky Income Timing Law in the “Means Test”

The means test essentially determines whether you can file a Chapter 7 “straight bankruptcy” which generally takes about 3 or 4 months or instead must file a Chapter 13 “adjustment of debts” which lasts 3 to 5 years.  The idea is behind the means test that if you have the “means” to pay a meaningful amount back to your creditors then you should be required to do so.

The easiest way to pass the “means test” and qualify for Chapter 7 is to have no greater income than the published median income for your state and family size. The quirky timing involved comes from two key aspects of this test:

1) Almost all sources of money are counted as “income” for this purpose, including, for example, cash gifts from any source, and any bonuses from your employer.

2) The period of time during which your income is counted for the means test is precisely the last 6 FULL calendar months prior to the date of filing bankruptcy, thereby EXCLUDING income received the month during which your case is filed.

One consequence of these two aspects of the law is that if you receive a chunk of money on December 1—say a gift from a parent to help you buy Christmas gifts for your kids, or an annual bonus—it is not counted for means test purposes if you file your bankruptcy case by that December 31. That’s because for cases filed in December, you count income received during the 6 prior full calendar months—June through November.

In the right circumstances, the timing of filing such a case could make the difference between passing the means test and discharging all your debts in a Chapter 7 case a few months from now, and not passing the means test and being required to pay as much as you can to your creditors in a Chapter 13 case for the next three to five years.

December Cash Gifts and Year-End Bonuses

This is best illustrated with an example.

As mentioned above, the median income amounts for the means test are different depending on your state and family size. You can find the median income applicable to you on the chart accessed through this webpage of the U. S. Trustee Program.

For the sake of our example, let’s assume that the median income applicable to you from that chart is $50,000. Let’s also say that you get paid on the 1^st and the 15^th of each month, receiving a gross salary of $2,000 per payday, or $1,500 after taxes. You started working for your employer on January 1 of this year and have had no income or funds from any sources whatsoever other than your employer since then. Except you received an annual bonus of $750 from your employer on December 1, and your parents—knowing you are having financial problems—gave you a holiday gift of $500 in cash on December 10.

Under these circumstances, as odd as it may seem, if you filed a Chapter 7 bankruptcy case on or before December 31 your income for means test purposes would be below your applicable $50,000 median income amount, but if you filed on January 1 or anytime during the following 6 months your income would be above that $50,000 amount.

The calculations for this are pretty straightforward. If you file on or before December 31, then the period of income that counts is the six full calendar months ending November—so June through November—during which time your total income was $4,000 per month, or $24,000 during that 6-month period, or $48,000 on an annual basis. That’s LESS than the applicable $50,000 median income, so you pass the means test.

However, as of January 1, the period of income that counts is the six full calendar months ending December—so July through December—during which time your total work salary income was $4,000 per month, or $24,000 during that 6-month period, PLUS the $750 bonus and the $500 cash gift, so a total of $25,250 during that 6-month period, or $50,500 on an annual basis. That’s MORE than the applicable $50,000 median income, so you’d fail at least this step of the means test.

So under these facts, filing on or before December 31 you would pass the means test, while on or after January 1 you would not pass the means test based on your income. (In this latter situation you may or may not eventually pass the means test based on your allowed expenses or other factors, but there’s at least a significant risk that you would not, and thus could not file a Chapter 7 case.)

The Bottom Line

Many people who want to file a Chapter 7 case have low enough income to pass the means test easily. Or even if they are close, they haven’t received a bonus or a cash gift to push them over the income amount so that it might benefit them to hurry to file a bankruptcy to pass the means test. But this example gives you just a taste of the kind of arcane laws that can affect when you should file a bankruptcy case. It should also give you a taste of the advantages you could gain by getting the legal advice you need, and the disadvantages you could avoid from doing so. And give you a taste of the importance of getting that advice early rather than late.

In this example, not only would being over the median income amount have potentially forced you into a multi-year Chapter 13 case instead of a quick Chapter 7 one, being over median income also requires you to pay into a Chapter 13 case for 5 full years (instead of 3). Besides likely costing you thousands of dollars more, you would have the tangible and intangible detriments of being in a Chapter 13 case for years. It would delay the repairing of your credit record for those years. You would have a much greater risk of not discharging your debt—since you must successfully get to the very end of the five-year payment plan before any of your debts are discharged in a Chapter 13 case. If your income increased during that time, you would likely need to pay more to your creditors. You would be under the supervision of the Chapter 13 trustee during this whole time, requiring you to report your income annually, prevent you from getting any credit without permission, and you would have to verify payments of any child or spousal support obligations or else risk having your case dismissed and your debts not discharged.

A Chapter 13 filed for good purposes—to save a home from foreclosure, to deal with a large income tax debt, etc.—is one thing. But to be stuck under Chapter 13 for no reason other than for failing the means test because of bad timing is a very unfortunate thing. For this reason, and a host of other possible reasons, see an experienced bankruptcy attorney as soon as you can to chart the best course, and the best timing, for you.