The timing of your Chapter 7 filing—a difference of even just a day or two—can affect whether you qualify for it based on your income.
How could filing your Chapter 7 a day or two earlier or later make such a big difference?
Usually it doesn’t. But sometimes it actually does. We’ll explain here.
The Point of the Means Test
One of the main goals behind the most recent major amendment to the bankruptcy laws in 2005 was to require more people to pay part of their debts through Chapter 13 payment plans instead of writing them off in a Chapter 7 “straight bankruptcy.” One of the main tools in the law for accomplishing this is the means test. This test uses a rigid financial test to determine who has the means to pay something to their creditors. This test is supposed to stop people from “abusing the bankruptcy system.” Those who have the means to pay a meaningful amount to their creditors in a Chapter 13 case are required to do so.
Taking Advantage of the Rigid Means Test
The means test was written rigidly to take qualifying for Chapter 7 out of the hands of bankruptcy judges. They were seen as being too soft on people filing bankruptcy.
But in real life rigid rules can have unintended consequences. An experienced and conscientious lawyer can turn these consequences to your advantage, and avoid their disadvantages. Here’s how this can play out with the means test.
What’s Rigid about the Means Test?
In our last blog post we explained the income step of the means test. That step qualifies most people because once you pass that step you pass the test. You don’t have to go any further (into your allowed expenses, for example.)
This income step essentially compares the income you received during the six FULL CALENDAR months before filing bankruptcy to a standard median income amount for your state and your family size. The question is whether your income DURING THAT PARTICULAR PERIOD is no more than the applicable median income amount. If not then you pass the means test and get to file a Chapter 7 case. (There are limited exceptions to this but they’re rare so we’re not getting into them here.)
If your income IS higher than the median amount, you may still be able to file a Chapter 7 case. But you’d have to jump through some extra hoops to do so. There’s a bigger risk that you would be forced to go through a 3-to-5-year Chapter 13 payment plan. So having your income be below the median income amount makes your case simpler and less risky.
The mean’s test is rigid in its fixation on those six prior full calendar months. Combine this with the fact that almost all money that comes into your hands during that period is counted. It’s not just taxable income. The means test includes ALL income during that precise period other than social security, tax refunds, and a few other rare exceptions. This combination of a very specific window of time plus including irregular sources of money creates opportunities to change your income for purposes of the means test.
How Can Filing a Day or Two Earlier or Later Matter So Much?
It can matter because that can change the 6-month period, which can significantly change your income for the means test. It’s clearest to show this by example.
Imagine you received some irregular chunk of money—a few catch-up child support payments, or an insurance settlement or reimbursement. Not a huge amount, say $2,500, received on April 10 of this year. Your only other income is from your job, with a $45,000 annual salary, or $3,750 gross per month.
Let’s say that the published median annual income amount for your state and family size is $48,000. Notice that your salary alone of $45,000 is less than applicable median income amount. Even including the $2,500 extra income—so totaling $47,500—you’d appear to have less than the median income amount.
Applying the Means Test
But that’s not the way the means test calculates income. If you were to file a Chapter 7 case in October—let’s say, on October 31, Halloween—you’d count the money received in the period from April 1 through September 30. That would be 6 months of your $3,750 salary—$22,500—plus the extra $2,500, which equals $25,000. Multiply that by two to get the annualized amount of $50,000. That’s higher than the $48,000 median amount for your family size in your state. So you’d fail the income portion of the means test, and may not be able to file a Chapter 7 case.
However, if you’d just wait to file one day until November 1 then the applicable 6-month period changes. It jumps forward by 1 full month to the new 6-month period of May 1 through October 31. Now that new period does NOT include the $2,500 you received in April. So your income during this 6-month period is $22,500, multiplied by 2 is $45,000. Now you’re under the $48,000 median income amount. That means you’ve passed the income portion of the means test, and so you qualify for your Chapter 7 case. You can skip the expenses and other parts of the means test, avoiding the risk of failing the test.