Good Reason to Delay Filing Bankruptcy until Now: To Take Advantage of the Timing Twists of the “Means Test”
Waiting until just the right time to file a Chapter 7 bankruptcy can help avoid being bounced into a 3-to-5-year Chapter 13 case.
Timing is Everything
When it comes to timing, there may be nothing in bankruptcy so picky about exactly when you file your case than the “means test.” The difference of waiting to file your Chapter 7 “straight bankruptcy” case by a single day could potentially make the difference between finishing that case in a Chapter 7 one in 3 or 4 months without paying anything to your creditors, and being bumped into a 3-to-5-year Chapter 13 case in which you pay all you can pay to your creditors during that time.
We addressed this issue late last year, explaining why waiting to file a Chapter 7 case in January may be better than filing in December. But because passing the “means test” can be so important to having a successful case, and because the quirkiness of the timing rules can be challenging, we focus again on how these timing rules work in practice.
Why Income is the Most Important Fact of the “Means Test”
The point of the “means test” is to determine if you have the “means” to pay your creditors. At the heart of this determination is a review of your income and expenses to see if you can pay a meaningful portion of your debts within a limited time. The test is roughly designed to see how much you would be able to pay back your creditors if you were forced to pay into a Chapter 13 case over time. In this comparison of your income and expenses, it’s crucial to know how the “means test” measures your income, as well as what expenses are “allowed.”
The income side of this comparison is all the more important because of an often very helpful twist in the law—you don’t even have to make the comparison between your income and expenses IF your income is less than a certain amount. You can in effect skip the “means test” and file a Chapter 7 case with very little risk that you would be bumped into Chapter 13 if your income is no more than the published “median income” amount for people in your state and of your size family.
In fact, most people who want to file Chapter 7 “straight bankruptcy” can do so because their income IS below their applicable “median income.”
This all points to how crucial it is to know how income is calculated for the “means test.” It’s also crucial to understand this because it’s nothing like you’d expect. And to go back to our initial point, it has to do with time, very rigid timing.
The Odd Timing of Income
Income is calculated in a very rigid way because of an effort in the law to be precise. But this timing precision creates opportunities for timing creativity to your potential advantage.
The period of time during which your income is counted for purposes of the “means test” is not the last calendar year or the last 365 days or anything like that. Instead you count all income received precisely during the last 6 FULL calendar months prior to the date of filing bankruptcy, and then multiply by two.
This means you DON’T count any income received during the days of the calendar month in which your case is filed. For example, if you file bankruptcy on January 20, you don’t count income you received from January 1 through January 20.
If your income is exactly the same every calendar month, then this definition of income doesn’t make much difference for you. But before you assume this, there is a second unusual aspect of the definition of income in the “means test.”
Income for the Means Test Means Virtually ALL Money Received
The 6-month income timing rule can get a lot more interesting when combined with a very expansive definition of “income.” Almost all sources of money are counted as “income” for the “means test,” not just wages and salary. It includes, for example:
- Income from any operation of a business, profession, or farm
- Interest, dividends, and royalties
- Pension and retirement income (except benefits under Social Security)
- Regular payments made by any third party for household expenses (like child or spousal support
- Unemployment compensation
When virtually ALL sources of incoming money is included in the meaning of “income” for the “means test,” then the timing rule becomes more important. When all sources of money are included, the likelihood of spikes in “income” increases. A spike in “income” from any source can push your calculated “income” higher than your applicable “median income,” creating both problems and opportunities for passing the “means test.”
Avoiding Income Spikes with Creative Timing of Filing
If you received an unusual chunk of money during the last 6 months or so, first have your attorney find out if that pushed your income beyond the “median income” that applies to you. If not, you’ll still be able to avoid doing the income/expenses comparison in the “means test.”
But if that unusual source of income did put you over your “median income,” work closely with your attorney see if you can reliable predict when and when that spike in income will no longer be counted, and if so whether at that time you will likely be below your state’s and family size’s “median income” amount. This has to be done very carefully thoroughly, because there’s usually some downside to delaying filing bankruptcy—the uncertainty and lack of peace of mind, and the risk of lawsuits, garnishments, repossessions and such. It would not be helpful to wait out the months until a chunk of “income” was received more than 6 months earlier, only to receive another unusual chunk of “income” in the meantime, still pushing you over the “median” amount.
Note also that if you are over the “median income” amount, your attorney can figure out if with your allowed expenses you would safely pass that next part of the “means test.” If so, you may well be able to file the Chapter 7 case without waiting until the spike in income was more than 6 months old.
It helps to have an idea how you can have low enough “income” under the “means test,” if necessary by waiting until a spike in income is no longer counted. Or that you can pass the “means test” by having high enough allowed expenses regardless of your income. But clearly, you would want the help of an experienced bankruptcy attorney in applying these rules to your unique personal circumstances.