Bankruptcy and the Holidays: File in Early 2014 because of the Means Test

The peculiar way that the means test is caculated may give you some opportunities. 

 

Our blog post of a couple of weeks ago was about what to do during the holidays to pass the means test. The key point was to consider filing bankruptcy before the end of December if you got a bonus or other chunk of money earlier in December. That’s because for purposes of the means test, income DOES NOT include the income received during that month that the case is filed.

But now that December is almost over (or completely over by the time many of you read this), for some people the quirks of the means test can make filing bankruptcy in January a good idea. In today’s blog post, we’ll remind you how the means test works and then provide a practical example of a January bankruptcy filing.

The Purpose of the Means Test

The means test to a large extent determines whether you can file a 3-4-month Chapter 7 “straight bankruptcy” or instead must file a 3-to-5-year Chapter 13 “adjustment of debts.”  The means test is intended to figure out if you have the “means” to pay your creditors a meaningful portion of what you owe. If so, then you should be required to do so through Chapter 13 instead of just wiping out the debts through Chapter 7.

The Income-Based Part of the Means Test

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. If you don’t pass this income-based part of the means test, you might still do so with the other parts of the test. But it’s so much easier and less risky simply to have low enough income.

The Unusual Timing of the Means Test

The means test measures income in an unusual way, which can present both problems and opportunities. Income is counted only during precisely the last 6 FULL calendar months before the date of filing bankruptcy. This means EXCLUDING the income received during the month that your case is filed, AS WELL AS any income received at any point BEFORE than that six-month period.

Filing As Soon As a Chunk of Income No Longer Counts

Here is an example illustrating how this works.

Image a person living by himself in a state in which his published median income is $50,000 who has earned a salary of $4,000 per month through all of 2013. This person also cashed in an Individual Retirement Account (IRA) on June 30, 2013 in the amount of $1,500 to have money to keep current on the mortgage.

If the person tried to file a Chapter 7 case anytime in December 2013, the income for means test purposes would be calculated as follows:

1) the pertinent six full calendar months would be June through November 2013;

2) employment income during that time was $4,000 times 6 months = $24,000;

3) add the $1,500 IRA contribution, for a total of $25,500 in income during that 6-month period;

4) multiply the $25,500 X 2 for an annualized income amount of $51,000;

5) since that is more than the applicable $50,000 median income, this person does not pass the income portion of the means test.

However, just as soon as January arrives, this person’s income for means test purposes dips below the $50,000 median income amount means test and so he IS qualified to file a Chapter 7 case. That’s shown by the following calculation:

1) NOW the pertinent six-month period moves ahead by a month, so it would include July 2013 through January 2014;

2) employment income during that time was $4,000 times 6 months = $24,000;

3) Don’t add the $1,500 IRA contribution, because it was made outside the pertinent six-month period;

4) multiply $24,000 X 2 for an annualized income amount of $48,000;

5) since that is less than the applicable $50,000 median income, this person DOES pass the income portion of the means test. 

 

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