The timing of your bankruptcy filing can determine whether you qualify for quick Chapter 7 vs. paying into a Chapter 13 plan for 3-5 years.
Timing Can Be SO Important
There are lots of ways you could greatly benefit from meeting with a bankruptcy lawyer sooner rather than later. You may save yourself lots of money by choosing an option that would not be available to you later.
There are many situations this could happen. Today we’ll address how filing sooner—say, before the end of 2018—might enable someone to pass the “means test” when that might not be possible later. Passing the means test means you’d likely qualify to file a Chapter 7 “straight bankruptcy” case. Otherwise you may be required to file a Chapter 13 “adjustment of debts” case.
Chapter 13 can be great in the right circumstances. But you don’t want to be forced into filing one quickly because you’re desperate for immediate relief from your creditors. If you had to file a Chapter 13 case because you didn’t have the flexibility to strategically time your filing, this could easily cost you many thousands of dollars. It could mean that you couldn’t discharge most of your debts in a matter of 3-4 months without paying anything on them vs. paying on those debts for 3 to 5 years.
Timing and Income in the Means Test
The means test requires people who have the “means” to do so, to pay a meaningful amount on their debts. If you don’t pass the means test you’re effectively stuck with filing a Chapter 13 case.
Be aware that a majority of people who need a Chapter 7 case successfully pass the means test. The most direct way to do so is if your income is no larger than the published “median income” amounts designated for your state and family size. What’s crucial here is the highly unusual way the means test defines income. This unusual definition creates potential timing advantages and disadvantages.
The Means Test Definition of Income
When considering income for purposes of the means test, don’t think of income as you normally would. Instead:
1) Consider almost all sources of money coming to you in just about any form as income. Included, for example, are disability, workers’ compensation, and unemployment benefits; pension, retirement, and annuity payments received; regular contributions for household expenses by anybody, including a spouse or ex-spouse; rental or other business income; interest, dividends, and royalties. Pretty much the only money excluded are those received under the Social Security Act, including retirement, disability (SSDI), Supplemental Security Income (SSI), and Temporary Assistance to Needy Families (TANF).
2) The period of time that counts for the means test is exactly the 6 full calendar months before your bankruptcy filing date. Included as income is ONLY the money you receive during those specific months. This excludes money received before that 6-month block of time. It also excludes any money received during the calendar month that you file your Chapter 7 case. To clarify this, if you filed a Chapter 7 case this December 15th, your income for the means test would include all money received from exactly June 1 through November 30 of this year. It would exclude money received before June 1 or received from December 1 through the date of filing.
The Effect of this Unusual Definition of Income
This timing rule means that your means test income can change depending on what month you file your case. To the extent you have flexibility over when to file, and if there are any shifts in the money you receive over time, you have some control over how much your income is for the means test when you do file your case.
So if you receive an unusual amount of money anytime in December, it doesn’t count if you file a Chapter 7 case by December 31. This unusual amount of money might be an employer’s annual bonus, a contribution from a parent or relative to help you pay expenses, or an unexpected catch-up payment of spousal/child support. Remember, if you file bankruptcy in December, only money received June through November gets counted.
Even relatively small differences in money received can make an unexpectedly big difference. That’s because the six-month income total is doubled to arrive at the annual income amount. So for example let’s say you got an extra $1,500 from whatever source(s) in December. If you file in December that extra doesn’t count, as just discussed above. But if you wait until January to file, December money is counted becasue the pertinent 6-month period is now July 1 through December 31. That extra $1,500 gets doubled, increasing your annual income by $3,000. That could push you above the designated “median income” for your state and family size. If so you’d likely not pass the means test and not qualify for Chapter 7, leaving you with Chapter 13 as your only option.
It is a fact that most people wait way too long before their initial consultation meeting with a bankruptcy lawyer. There are many very understandable reasons for this. But do yourself a favor and be the exception. See a lawyer not because you’re at the very end of your rope and need immediate relief from your creditors. Instead see one because you want to learn about your options. Do this sooner and you may have some significantly money-saving options that you might not have had otherwise. In 2015, we visited this topic. If you would like more to read, please feel free to visit the blog here.