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Archive for the ‘Pre-bankruptcy Planning’ Category

Bankruptcy Timing and the Holidays: Filing in January to Qualify for Chapter 7 or Shorten Chapter 13 Case

December 28th, 2015 at 2:00 am

Think about filing bankruptcy in early 2016 if you had some extra source of money in mid-2015.


Some people can take advantage of the peculiar way that bankruptcy law calculates “income” for purposes of the “means test” by filing their Chapter 7 case with the right timing. Doing so could qualify them for Chapter 7 when otherwise you may not.

Others can take similar advantage of the way “income” is calculated for purposes of determining their Chapter 13 “commitment period”—the minimum length of time they have to pay into their court-approved payment plan. With the right timing their commitment period would be 3 years instead of 5 years.

Today, after reminding you briefly how “income” is calculated for these two purposes, we’ll give you an example how a January bankruptcy filing could save you a great deal of money.

The Purposes of the “Means Test” and “Commitment Period“

The “means test” determines to a large extent whether you can file a Chapter 7 “straight bankruptcy,” lasting only about 4 months, or instead must file a Chapter 13 “adjustment of debts,” which usually lasts 3 to 5 years.  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 would be required to do so through Chapter 13 instead of just quickly discharging (legally writing off) the debts through Chapter 7.

The “commitment period” calculations determine, as mentioned above, whether your Chapter 13 payment plan must run 3 years or instead 5 years. If the latter, that can mean paying thousands of dollars more to your creditors. It can also mean delaying when you can start repairing your credit.   

“Median Income”

The “median income” for your family size in your state is similar but not the same as the average income. Median income is the amount at which half the people for your family size in your state have income of less than that amount and half have more than that amount.

The “median income” amounts are adjusted regularly and published by the U.S. Trustee Program of the Department of Justice. For cases filed November 1, 2015 and for several months thereafter, those state-by-state amounts can be found here.

Qualifying for a Chapter 7 case by passing the means test turns to a large extent on whether your “income” (as calculated for this purpose) is no more than the “median income” for your family size in your state.

Qualifying for a 3-year Chapter 13 case (instead of a 5-year one) turns effectively on whether your “income” (calculated the same as for the means test) is no more than the “median income” for your family size in your state.

The Calculation of “Income”

For these two purposes “income” is calculated as follows: first, virtually all money received is included, not just taxable employment income (except for Social Security); and second, that money received is counted only during precisely the last 6 FULL calendar months before the date of filing bankruptcy. This means EXCLUDING any money received at any point BEFORE that that six-month period.

So sometimes it makes a huge difference to wait to file bankruptcy until more than 6 months has passed after you receive some money that pushes you above the median income amount.

An Example

Here’s how this works.

Consider Henry, living alone, in a state in which the applicable median income is $48,000 for a family of one. He received a salary of $3,900 per month through all of 2015, each paid on the last day of the month. That totals $46,800 for the year.

Henry also received a mid-year bonus from his employer in the amount of $2,500 on June 30, 2015.

If he filed a bankruptcy case anytime in December 2015, Henry’s “income” would be calculated as follows:

1) the six full calendar months for counting “income” would be June through November 2015 (June 1 through November 30);

2) employment income during that time was $3,900 times 6 months = $23,400;

3) add the $2,500 IRA contribution, for a total of $25,900 in income during that 6-month period;

4) multiply the $25,900 by 2 for an annualized income amount of $51,800;

5) since that is more than the applicable $48,000 median income for Henry’s family size in his state, he does not pass the income portion of the “means test” so he may not qualify for Chapter 7; if he filed a Chapter 13 case he could not do a 3-year payment plan but would rather have to pay for 5 years.

However, just as soon as January arrives, Henry’s “income” becomes less than the $48,000 median income amount. Here are the calculations:

1) the pertinent six-month period moves ahead by a month, so now it would include July 2015 through January 2016 (July 1 through January 31);

2) employment income during that time was the same $3,900 times 6 months = $23,400;

3) Don’t include the bonus received on June 30, 2015 because that’s now outside the six-month period;

4) multiply $23,400 by 2 for an annualized income amount of $46,800;

5) since that is less than the applicable $48,000 median income, now Henry has less “income” than the median amount.

As a result, by waiting to file his bankruptcy case not in December 2015 but rather in January 2016, Henry can much more easily qualify for Chapter 7 by passing the “income” portion of the “means test.” And if he chooses to file a Chapter 13 case instead, the minimum length of his payment plan would be 3 years instead of 5 years.

 Notice that under these facts Henry could wait literally just one day, from December 31 to January 1, for the big difference described here.


Bankruptcy Timing and the Holidays: The “Cash Advances” Presumption of Fraud

December 14th, 2015 at 2:00 am

If you can, don’t do cash advances during the holidays if you’re contemplating filing bankruptcy. If you do, understand the rules about them.


In our last blog post we explained the “luxury” presumption of fraud. This provision in bankruptcy law increases the risk that you would not be able to “discharge” (legally write off) a very particular kind of debt. That kind of debt would be one that resulted from a purchase or a set of purchases totaling more than $650 made during the 90 days before filing bankruptcy.

The “cash advances” presumption of fraud is closely related to the “luxury” one. The dollar amounts and timeframe are just a little different. This “cash advances” presumption increases the risk that you would have to pay a debt tied to a cash advance or set of cash advances totaling more than $925 made during the 70 days before filing bankruptcy. (Notice that for this presumption to kick in, you incur somewhat more credit in a somewhat shorter period of time than with the “luxury” presumption of fraud.)

The Risk of Doing Cash Advances Shortly Before Filing Bankruptcy

We keep talking about the increased risk of not discharging a debt. What do we mean by this?

We mean that you could very well still discharge a debt from a cash advance done within the 70 days and more than $925. There’s just a greater risk that you couldn’t. Let us explain.

First, if you happen to do a cash advance of more than $925 (or a series of them with the same creditor) within the 70 days before filing bankruptcy, you may not have to pay that debt. That’s because you will not have to pay it unless a creditor complains about it, and does so within a deadline which is about 100 days after your bankruptcy case is filed. If you list the creditor in your bankruptcy case and it doesn’t complain within the deadline, that cash advance debt would simply be written off.

Second, the creditor may file a formal complaint and do so on time but that doesn’t mean it will win. A cash advance within the 70 days and exceeding $925 only creates a presumption that you didn’t intend to pay that debt. That presumed intent can be defeated by evidence showing that you did actually intend to pay it at the time you did the cash advance(s).

Third, you can avoid this “cash advance” presumption altogether by simply waiting to file your bankruptcy case until at least 71 days after the (latest) cash advance.  Then the creditor gets no presumption of fraud and actually has to come up with evidence that you didn’t intend to pay the cash advance debt. Without some evidence it can’t file a complaint (although the evidence could be circumstantial, such as you not making any payments on the account after the cash advance indicating lack of intent to pay it).

The Risk of Doing Cash Advances More than 70 Days before Filing Bankruptcy

Even a cash advance done outside the 70-day presumption period comes with some risk that this cash advance debt would have to be paid. The creditor just has to have evidence that you didn’t intend to pay the debt, no matter when the debt was incurred.

Two Practical Truths about the Advantage of Presumptions of Fraud

Beyond anything written in the law, here’s why the “cash advance” presumption of fraud (and the “luxury” one as well) works in favor of creditors:

1) The presumptions allow creditors to win without any evidence of fraud in cases where the debtors don’t respond to the creditors’ complaint. Because debtors who file bankruptcy not represented by an attorney are much more likely to not respond, some creditors are more inclined to file these complaints in those unrepresented cases. When the debtor does not respond on time, the creditor gets a judgment by default against the debtor.

2) When a debtor does respond (generally through his or her attorney) to a creditor’s complaint, the matter is often settled with the creditor getting paid at least something out of the cash advance at issue. That’s because the high cost in attorney time compared to the relatively small amounts usually at issue often makes fighting the complaint much more expensive than just quickly settling it.

Because of these two practicalities, the presumptions of fraud gives creditors more motivation to file complaints whenever there is a cash advance exceeding $925 during the 70 days before a bankruptcy filing, even without much indication that the debtor didn’t intend to pay that debt at the time.

The Bottom Line

The presumption only gives a modest legal leg up. But the practical advantage is significant. So whenever possible it’s usually worth waiting to file your bankruptcy case until after the 70-day “cash advance” presumption of fraud period (and the 90-day “luxury” one as well) has passed.


Bankruptcy Timing and the Holidays: The “Luxury” Presumption of Fraud

December 11th, 2015 at 8:00 am

If you’re considering filing bankruptcy, try to avoid using credit cards to finance the holidays. But if you do, there are some extra risks.


Using Credit Shortly Before Filing Bankruptcy

Using credit during the holidays if you’re contemplating bankruptcy is dangerous. It could be considered fraud if you run up debt that you don’t intend to honor.

What is “Fraud” in Bankruptcy?

The bankruptcy system rewards honesty. One of the core principles in bankruptcy is that debts which are entered into honestly can later be written off, while debts entered into through cheating cannot.

When you incur a debt, you are agreeing to pay the debt. If at the time you are incurring a debt you actually don’t intend to pay it, that would be cheating. Falsely saying or implying that you intend to pay the debt would be a misrepresentation and likely a fraud. There is a risk that such a debt would not be written off (“discharged”) in bankruptcy.

Charging on a Credit Card

Credit card debts are usually discharged without any problem in bankruptcy. But if you made a misrepresentation to a creditor in order to get the credit card in the first place, or used the card without intending to pay for those purchases, that creditor could challenge your ability to get its debt discharged.

Using false information to get a new credit card account is relatively rare. It’s not hard to understand that doing so is wrong, that it’s behavior that shouldn’t be rewarded by the discharge of that debt.

But for various reasons buying something on a credit card even when you’re considering bankruptcy, seems different, because:

  • Your actual intention at the time you make the purchase could genuinely be quite vague—maybe you’ve not actually decided to file bankruptcy, are hoping to pay the debt, but are feeling pretty hopeless about ever being able to.
  • You figure the particular purchase is relatively small, so one way or the other it’s not a big deal.
  • You may be using the credit card by force of habit, and not even thinking much about whether you can pay it.
  • You may be quite desperate, very much needing to make the purchase regardless of your ability to eventually pay for it.

For these kinds of reasons it’s not uncommon for people to use credit cards not long before filing bankruptcy. And although creditors don’t always object in these situations, they do so probably more than in any other kind of “fraud” situation.

What’s a “Presumption of Fraud”?

One of the reasons that creditors are more prone to object to the discharge of recent credit card charges is that bankruptcy law helps them do so. The law does so through a “presumption of fraud” for “luxury” purchases.

Bankruptcy law accepts the reality that it’s not easy for a creditor to determine your intent at the moment you make a purchase. It’s often not easy to prove in court that you didn’t intend to pay a debt at that point.

So the law gives the creditors an advantage. Under certain very specific circumstances involving the timing and amount of the purchase, the law will presume that you made a purchase without intending to pay for it. The creditor doesn’t necessarily need to establish through evidence what your actual intent at the time was.

What’s the “Luxury” Presumption of Fraud?

Specifically, if you buy more than $650 in “luxury goods or services” from any single creditor during the 90-day period before your bankruptcy is filed, that debt is presumed to not be discharged. The presumption applies not to the entire balance of the debt but only that part incurred during that 90-day period.

Be careful because “luxury” is defined much more broadly than normal—“luxury goods and services” includes everything other than those “reasonably necessary for the support or maintenance of the debtor or a dependent.” That could include virtually anything that isn’t an absolute necessity.

The Presumption Can Be “Rebutted”

Once the creditor “raises the presumption” by alleging the necessary facts to fit within the presumption, you can respond by “rebutting the presumption.” The presumption is only a presumption, it’s not proof. The creditor can win with only the presumption of fraud if you don’t push back. But if you do have the right facts you can defeat the presumption and not have to pay the debt.

 So if you made a purchase or purchases exceeding $650 within the 90 days and the creditor complains about it to the bankruptcy court, if you in fact HAD intended to pay the debt at the time you made the purchase you would respond to the court about your honest intent. You and your attorney do this through your own direct testimony about your intent and/or by establishing other relevant facts, such as what happened in your financial life after you made the purchase(s) which subsequently convinced you to file bankruptcy.

The Debt is Discharged Unless the Creditor Complains

Even if the timing and dollar amount would mean that one of the presumptions would apply, that debt is still discharged if the creditor does not make a formal complaint about it. This is true no matter how good or bad your intention was at the time you made the purchase(s). The reality is that creditors often don’t bother complaining, usually because the amount at issue is too small to justify them incurring more expenses to make you pay it.

The creditor’s complaint must be made on time. The deadline for creditors to complain is a quick one—60 days after your “meeting of creditors”—so usually within about three months after your case is filed. After this deadline passes the creditors can no longer raise objections, so at that point you no long need to be concerned about it.

Fraud Can Be Proved Without the Presumptions

Don’t assume that purchases that you make earlier than this 90-day period necessarily mean a creditor could still complain. The presumptions just give the creditors a procedural advantage. But they are free to try to prove a misrepresentation or fraud no matter when it happened.

For example, if someone paid for an $8,000 vacation cruise on a credit card, and then filed a bankruptcy case 91 days later, the 90-day presumption of fraud wouldn’t apply. But the creditor would nevertheless likely be able to put together evidence to convince a bankruptcy judge that more likely than not that the person didn’t intend to pay that new $8,000 debt. If the person didn’t make a single payment on the account after that $8,000 charge, was already insolvent before making that charge, and didn’t experience any new financial setbacks between then and filing bankruptcy 91 days later, these could potentially be enough circumstantial evidence that the person was not expecting to pay for that cruise.

During the Holidays

So if you can, avoid using credit if you are considering bankruptcy. For the same reasons you should not finance the holidays on whatever credit you may have available. Doing so can result in the new debt not being written off when you do file a bankruptcy case, or may affect its timing.

But in any event, and especially if you’ve already used credit recently, see a bankruptcy attorney as soon as you can to determine what’s in your best interest. You’ll learn what you do and don’t need to be concerned about, and how to best posture and time the filing of your bankruptcy case to meet your needs.


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