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Archive for the ‘income’ tag

More Bankruptcy Benefits for Your Home

June 24th, 2019 at 7:00 am

Besides helping with your mortgage, bankruptcy protects your home against other liens—from judgments, income taxes, and homeowner associations.  


Last week we gave you 7 ways that bankruptcy can either save your home now or protect it going forward. Here are the remaining 8 ways (#8 through #15), mostly involving involuntary liens placed on your home by special creditors.

8. Judgment lien “avoidance”:  

You can get rid of a present judgment lien that’s on your home’s title if it “impairs” your homestead exemption. This means that it “eats into” the equity that is protected by the exemption. Judgment lien avoidance turns a secured debt that you’d have to pay to protect your home into an unsecured one. See Section 522(f)(A) of the U.S. Bankruptcy Code.  You could then usually write off (“discharge”) that unsecured debt in a Chapter 7 “straight bankruptcy” case. Or you could pay little or nothing on that debt in a Chapter 13 “adjustment of debts.”  

9. Prevent future judgment liens:  

Bankruptcy stops ongoing or future lawsuits against you. See the “automatic stay” of Section 362(a)(1) and(6) of the Bankruptcy Code. First, ongoing lawsuits are usually frozen in their tracks so they can never turn into judgments. Second, any creditors which have not sued you beforehand usually can’t ever do so (with some rare exceptions). So they can’t get a judgment, and can’t ever record a judgment lien on your home. Since not all judgment liens can necessarily get “avoided” under #8 above, it can be very important to file bankruptcy with your bankruptcy lawyer before a creditor gets a judgment.

10. Prevent upcoming income tax liens by discharging the tax debt: 

Similarly, in many situations bankruptcy prevents the IRS or your state from recording an income tax lien against your home. Section 362(a)(4 and 5). Under either Chapter 7 or 13 you can discharge older and otherwise qualifying tax debts. During the bankruptcy case the IRS/state can’t record a tax lien. And it can’t do so afterwards because the tax debt no longer exists. So, your bankruptcy filing prevented the tax from being secured against your home, which would’ve created serious disadvantages for you. As a result it’s highly preferable to file bankruptcy before a tax lien gets recorded.

11. Prevent upcoming income tax liens by paying off the tax debt:  

If the tax debt is newer or otherwise doesn’t qualify for discharge, pay the tax through Chapter 13 filed through your bankruptcy lawyer. Section 1322(a)(2). You pay the tax based on your realistic budget instead of the IRS/state’s imposed one. You can delay paying on the tax while you pay more important debts (such as to catch up on your mortgage). You don’t pay ongoing interest and penalties (since the debt is unsecured). Again, during the case the IRS/state can’t record a tax lien. And it can’t afterwards because by then you’ll have paid off the tax. You’d have prevented IRS/state from gaining the significant advantage against you of a recorded tax lien.

12. Prevent or address a child/spousal support lien against your home:  

Discharge your other debts with a Chapter 7 or 13 case so that you don’t fall behind on support payments. Or if you’re already behind, catch up on your support obligations with a Chapter 13 payment plan. As long as you pay as you’ve agreed, no new support lien can be imposed on your home. And your ex-spouse or support enforcement agency can’t foreclose on any pre-existing support lien. Your home is protected while you catch up.

13. Protect your home from your homeowners’ association:

If you’re get behind on homeowner association dues and/or assessments, your HOA gains tremendous power over you. You can regain the upper hand by filing a Chapter 13 case. You have to pay the back dues or assessment(s) if you want to keep your home. But you have as much as 5 years to catch up through a Chapter 13 payment plan. Throughout that time the HOA can’t foreclose or take other collection action, as long as you’re paying your plan.

14. Buy time to sell your home:

In many different situations, bankruptcy gives you more time to sell a home. You may need more time to get it ready for sale, or may want to move later for personal reasons. Chapter 7 usually delays a mortgage foreclosure, or similar actions against your home by other lienholders, for a few weeks or months through Chapter 7. You can likely get much more time to sell, sometimes as long as 5 years, through Chapter 13.

15. Resolve accounting disputes with your mortgage lender:

If you fall behind on your mortgage, it can be shockingly difficult to get on the same page with your lender about how much you owe. This is especially true if you have a history of being behind over an extended period. This accounting confusion has been a serious problem for millions of homeowners over the last decade or two. So, in 2011 a new procedure was created (mostly for Chapter 13) to efficiently resolve such disputes. See Rule 3002.1 of the Federal Rules of Bankruptcy Procedure. It’s a very handy tool when you’re trying to save your home and your lender is not cooperating.

 

Why Timing Can Be So Crucial for the Means Test

October 9th, 2017 at 7:00 am

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.  

 

The Means Test is Based on Timing

October 6th, 2017 at 7:00 am

Most people easily pass the means test based on their relatively low income. Timing plays a huge role in calculating your income.   


The Means Test

To file and complete a Chapter 7 “straight bankruptcy” case you have to qualify for it. The main hurdle in qualifying is what’s called the “means test.”  That is, to qualify for Chapter 7 you have to show that you don’t have too much “means.”

You do that mostly through your income. The start, and for most people the end, of the means test involves comparing your income to a set median income amount. If your income is no more than median income amount for your family size in your state, you pass the means test.                  

Being able to file a Chapter 7 case by passing the means test is usually very important. That’s because if you have more “means” (income) than you’re allowed, you usually have to file a Chapter 13 case instead. That involves a 3-to-5-year payment plan, instead of the 3-4-month Chapter 7 procedure. Chapter 13 is great in the right circumstances. It has great tools unavailable under Chapter 7. But if you just need the quick relief of Chapter 7 being forced instead into a Chapter 13 case is a serious setback.

The Timing Focus of the Means Test

As we said above, the easiest way to pay the means test is for your income to be no larger than the published “median income” amount for a family of your size in your state. If your income is no more than that then right away you’ve passed the test. You’ve overcome the biggest qualification for filing a Chapter 7 case.

But your income for purposes of the means test is not calculated in any way you might think. In particular the timing aspect of how your income is calculated is unusual.

Your income for purposes of the means test is not based on your income for the previous calendar year, or prior 365 days or 12 months. It’s not based on any kind of annual basis. Instead it’s based on your income of the six full calendar months prior to the filing of your case.

  • For example, if you and your bankruptcy lawyer file your case during any day in October 2017, the pertinent prior-six-full-calendar-month period is from April 1 through September 30, 2017. After adding up the income received during that six-month period multiply it by two for the annual amount.
  • Your income for the means test is not just your “taxable income.” Instead include just about every bit of income or money you receive from all sources during that period of time. This includes irregular sources of money such as child and spousal support payments, insurance settlements, unemployment benefits, and bonuses. However, exclude all types of social security-based income.

The Median Income Amount for Your Family Size and State

The last step is to compare your income amount as you just calculated to the median income for your state and your size of family. You can find that median income amount in the table that you can access through this website. (This median income information gets updated every few months so be sure to use the current table.)

Conclusion

If your income, as calculated in this distinct way, is no more than the median income for your state and family size, then you’ve cleared the means test hurdle! You can very likely proceed through Chapter 7 bankruptcy.

Next time we’ll focus on the opportunities presented by this quirky way of calculating income for the means test.

 

Timing Can Be Crucial for Passing the Means Test

July 10th, 2017 at 7:00 am

With smart timing you can take advantage of the unusual way that your “income” is calculated for the Chapter 7 means test.  

Passing the Means Test

We introduced the means test a couple of weeks ago and said that many people pass this test simply by having low enough income.  Their income is no larger than the published median income for their state and family size.

We also explained that income for this purpose has an unusual definition. It includes:

  • not just employment income but virtually all funds received from all sources—including from irregular ones like child and spousal support payments, insurance settlements, cash gifts from relatives, and unemployment benefits (but excluding Social Security);
  • funds received ONLY during the 6 FULL CALENDAR months before the date of filing, multiplied by two for the annual amount.

In other words, if you file a Chapter 7 case on any day of July, you count all funds received during the period January 1 through June 30. Then you double it and compare that to the applicable median income amount.

This very broad definition of “income” received within this very definite time period has some important tactical consequences for you. Under the right facts your “income” for the means test could shift significantly if you file your Chapter 7 case one month vs. the next. It could increase or reduce your “income” by enough to qualify or not qualify under Chapter 7.

We’ll show how this is possible through the following example.

An Example

Assume the following facts:

  • You have employment income grossing $3,750 per month that you consistently earned and received through the last several years.
  • Back in January you also received a modest auto insurance settlement of $2,500 from an insurance company.
  • The median annual income for your state and family size is $46,412.

Your “income” for means test purposes in July is:

  • 6 times $3,750 employment income = $22,500.
  • $22,500 plus $2,500 insurance proceeds = $25,000 total income from January 1 through June 30.
  • $25,000 times 2 = $50,000 annually.

Since $50,000 is more than the applicable median annual income amount of $46,412, you don’t pass the means test. (At least you don’t on the first income-only step. You may still pass by going through the expenses part of the test, but that’s beyond today’s blog post.)

So what happens if you don’t file your Chapter 7 case in July but rather wait until August? Here is the new income calculation:

  • 6 times $3,750 employment income = $22,500.
  • There’s no additional $2,500 from the insurance settlement because you received it in January while the pertinent 6-month period now is February 1 through July 31.
  • So $22,500 times 2 = $45,000 annually.

Since $45,000 is less than the applicable median annual income amount of $46,412, you now pass the means test. You qualify for Chapter 7. 

 

A Simple Example of Passing the Means Test

July 5th, 2017 at 7:00 am

 We show by example how the means test works, when a person qualifies for a Chapter 7 case simply by income.  


An Example is Worth a Thousand Words

You have to pass the means test to qualify for a Chapter 7 “straight bankruptcy. In a recent blog post we said that the easiest way to pass the means test is by your income. If your income is low enough you pass without having to look at your allowed expenses or special circumstances.  Let’s see how this works by way of an example.

Our Example—The Facts

Jeremy and Allison need bankruptcy relief. Their bankruptcy lawyer has recommended that they file a Chapter 7 case based on their circumstances. They have decided to do so.

They are both employed and get paychecks twice a month, on the 1st and 15th of the month. Jeremy has a gross income of $2,750 per month and Allison $3,250 per month.

They have two children who live with them in their home in Indiana.

“Income” for the Means Test

For purposes of the means test you count virtually all sources of incoming money (other than from Social Security). But you count only money received during the 6 FULL CALENDAR months before filing the Chapter 7 case.

Allison and Jeremy want to file their case during July. So they look at the income they’d received during the period from January 1 through June 30, the 6 full calendar months before. That’s 6 times $3,250 for Allison, or $19,500, plus 6 times $2,750 for Jeremy, or $16,500, or a combined $36,000. Multiply that by 2 to get an annual income of $72,000.

The Median Income for Your Family Size in Your State

Allison and Jeremy would pass the means test the most easily if their income, as just calculated, would be no larger than the median income amount for their family size in their state.

The median income amount for a group of people is similar to their average income amount, but not quite. It’s the amount at which half of the people have a greater income and half have less.

So for Jeremy and Allison, the median income is the amount at which half of the families of four people in Indiana have more income and half have less. How do they find out that amount?

It’s provided online by the U.S. Trustee. Here is a table showing the most current information of this writing. (This table is updated every few months so check here for more current median income tables.)

Notice that the median income for Jeremy and Allison’s family size and state is $77,566. Their income as calculated above, at $72,000, is less than this median income amount.

Conclusion

As a result Allison and Jeremy pass the means test simply on the basis of their income. They and their lawyer don’t need to go through the process of figuring out and deducting all their allowed expenses to find out if they pass the means test. Their income is low enough. It’s presumed that they don’t have enough money left over to pay a meaningful amount back to their creditors.

 

The New Median Income Amounts for the Chapter 7 “Means Test”

March 21st, 2016 at 7:00 am

Besides the many 3-year cost of living increases happening on April 1, 2016, new median income amounts also start applying on the same day.

 

Last week we finished a series of about a dozen blog posts related to an every-3-year cost of living adjustment of many of the dollar amounts that are within the bankruptcy statutes. Because inflation during the last few years has been relatively low, these dollar amount increases were modest. (See this notice in the Federal Register.) But they are still important because on the margins they can affect everything from whether you can qualify for bankruptcy, what assets you can keep, what debts you can “discharge” (write off), and how long your case will last. All these changes apply to bankruptcy cases that are filed on or after April 1, 2016.

Besides these every-3-year adjustments, bankruptcy law requires separate cost of living adjustments of the median family income amounts for each state and family size. (See Section 101(39A) of the Bankruptcy Code.) The next one of these median family income adjustments happens also on April 1, 2016. This is the topic of today’s blog post.

The Median Family Income Amounts Matter Because… ?

You qualify for a Chapter 7 “straight bankruptcy” case if your income is no more than the median family income amount for your family size and state. If so you immediately pass the “means test.”

Even if your income is somewhat higher you may still pass the “means test.” But that would then depend on whether your income is higher than the amount of your allowed expenses, and how much so. If still too high, whether you pass could depend on the amount of your debts.

So if your actual income amount is no more than the applicable median family income amount you pass the “means test” immediately. Otherwise you may or may not pass once you have to get into these other factors.

If you don’t pass the “means test” you would likely have to proceed instead under a Chapter 13 “adjustment of debts” case. That takes much, much longer—3 to 5 years instead of about 4 months with a Chapter 7 case. And instead of discharging most of your debts that quickly, under chaper13 you’d have to pay what you could afford during that 3-to-5-year span.

And even if you wanted to do a Chapter 13 case in the first place to benefit from its own many advantages, the median family income amount can be very important. If your actual income is no more than you applicable median family income amount, you are obligated to pay into your Chapter 13 plan for no more than 3 years. If your actual income is higher, you are obligated to pay for a full 5 years.

The April 1, 2016 Increases

The median family income amount adjustments are generally done twice a year, once in October or November and then sometime the following February through May. The data gathering is done by the U.S. Census Bureau and also made available for bankruptcy purposes by the U.S. Trustee’s Office (a branch of the U.S. Department of Justice). Here is a table of the ones effective starting April 1, 2016, and of the prior ones effective from November 1, 2015 through March 31, 2016.

For some idea of the median family income amounts, here is a list of them for 8 states, focusing first on the family sizes of a single person, showing the modest increases between these two time periods:

STATE

1 EARNER

1 EARNER

 

11/1/15-3/31/16

STARTING 4/1/16

Indiana

$43,422

$43,474

Kentucky

$41,333

$41,382

Montana

$41,692

$41,741

Oregon

$47,809

$47,864

Texas

$44,178

$44,230

Utah

$54,250

$54,314

W. Virg.

$43,054

$43,105

Wisconsin

$44,764

$44,817

And now here are the same 8 states, focusing now on family sizes of 4 people, again showing the increases between these two time periods:

STATE

FAMILY OF 4

FAMILY OF 4

 

11/1/15-3/31/16

STARTING 4/1/16

Indiana

$74,584

$74,673

Kentucky

$69,593

$69,676

Montana

$71,261

$71,346

Oregon

$76,240

$76,330

Texas

$72,612

$72,698

Utah

$75,687

$75,777

W. Virg.

$67,036

$67,116

Wisconsin

$85,859

$85,961

Please see our blog posts of March 7, 2016 and November 13, 2014 explaining how to apply these median family income amounts to your own income. You’ll get an idea at least whether you can pass the “means test” easily based solely on your income, as to both before and after April 1, 2016.

 

Larger Families More Likely to Qualify for Shorter Chapter 13 Cases

March 11th, 2016 at 8:00 am

Soon families of larger than 4 people can have a bit more income and qualify for a 3-year Chapter 13 payment plan instead of a 5-year one.

 

How could it be that larger families can have shorter Chapter 13 “adjustment of debts” cases?

The reason is that on April 1, 2016—as happens every 3 years—there will be a modest increase in the “median family income” calculation for “a debtor in a household exceeding 4 individuals.” This matters because whether your Chapter 13 case can last 3 years or instead must go for 5 years depends whether your “current monthly income” is more than the published “median family income” amounts for your size of family in your state.

If your “current monthly income” is not more than the published “median family income” then your Chapter 13 case is not required to go longer than 3 years. If it is more, then your case is required to go 5 years.

We explain the upcoming change in the rest of this blog post, and why it only affects “households exceeding 4 individuals.”

Two Different Adjustments Happen in Tandem

This can get confusing because there’s another much more frequent “median family income” adjustment besides the April 1 every-3-year adjustment just affecting households of larger than 4. The published “median family income” amounts affecting every state and ALL household sizes are adjusted much more often—usually about 2 or 3 times a year. As of this writing the most recent across the board adjustments of this type were made effective November 1, 2015 and May 15, 2015.

“Median Family Income” for Households Larger than 4

But these more regularly updated “median family income” amounts only directly refer to household sizes of from 1 to 4 individuals. For larger households, you add a stated dollar amount for each additional individual in the household to come up with the appropriate “median family income” for the household. This monthly additional dollar amount per additional household member was $525 when the law on this was passed in 2005, and has been increasing every 3 years since then. For the last 3 years this amount to add for each additional household member was $675. On April 1 this amount is increasing to $700 more for each additional household member.

On an annual basis, this in an increase in the “median family income” from $8,100 per additional individual ($675 times 12) to $8,400 per additional individual ($700 times 12).

How This Works

If the published annual “median family income” for a household of 4 is $60,000, then before April 1 that amount for a household of 5 would have been $68,100 (which is $60,000 + $8,100). As of April 1 that amount will be $68,300 ($60,000 +$8,300). A small increase. But if it makes the difference between paying a Chapter 13 plan for 3 years instead of 5 years, that could make a huge difference.

 

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: Extra Income in December Affecting the “Means Test”

December 9th, 2015 at 8:00 am

We show step-by-step how filing bankruptcy before the end of December can enable you to qualify for Chapter 7 “straight bankruptcy.”

 

Have you received or are you expecting any extra money from any source during December? It’s probably the month when that’s most likely. If you are fortunate you may receive a bonus from your employer, or you’re working a part-time Holiday job or getting bigger paychecks because of overtime. Or you may get a cash gift from a parent or some other relative, either for yourself or to help buy gifts for your kids.

In our last blog post a couple days ago we explained the reasons why filing bankruptcy DURING the calendar month that you receive some usual income can help you qualify for Chapter 7, and avoid being forced into a Chapter 13 case. Today we give you an example to help make sense of this.

Quick Summary of the Income Timing Laws in the “Means Test”

Practically speaking the means test determines whether you qualify for a Chapter 7 “straight bankruptcy” which usually takes less than 4 month, or instead must do a 3-to-5-year Chapter 13 “adjustment of debts.” The easiest way to pass the means test is for your “income” to be no more than the appropriate “median income” for your state and family size.

But “income” for the means test is different than you’d expect: it includes 1) almost all sources of money, but 2) only the amounts received precisely during the last 6 FULL calendar months. The 6-month amount is multiplied by 2 for the annual “income” total. 

An important consequence of this odd definition of “income” is that if you receive a bonus or any other unusual income or money during December, that will not be counted for the means test as long as your Chapter 7 case is filed by December 31. Doing so makes it more likely that your income will be less than your applicable “median income,” and therefore you’d qualify for a Chapter 7 bankruptcy.

Now let’s put these principles into practice.

Our Example

Let’s assume that the median income amount for your family size in your state is $56,000. So if your means test “income” is no more than that you effectively qualify for Chapter 7.

(You can find the median income that actually applies to you on this chart of the U.S. Trustee Program. As of this writing this chart is current for bankruptcies filed on or after November 1, 2015. It’s updated about every half-year.)

Let’s also say that you get paid on the 1stand the 15th of each month, receiving a gross salary of $2,200 per payday, or $52,800 per year. You started working for your employer in 2013, and until this month have received no income or funds from any sources whatsoever other than your employer since then. But you received an annual bonus of $1,200 from your employer on December 3, and your parents gave you a holiday gift of $900 in cash on December 7.

In this situation if you filed a Chapter 7 bankruptcy case in December before the end of the month, your income for means test purposes would be below the $56,000 median income amount. So you’d immediately pass the means test. That’s because your “income” during the 6 full calendar months of June through November would be $52,800, consisting of 2 paychecks of $2,200 gross income per month, or $4,400 per month times 6 months, or $26,400, times 2 for the annual amount of $52,800.               

But if instead you filed anytime in January of next year, your income would be above that $56,000 median income amount. So at least as far as your income goes you would not pass the means test. That’s because your “income” during the 6 full calendar months of July through December would be $56,600, consisting of 2 paychecks of $2,200 gross income, or $4,400 per month times 6 months, or $26,400, plus the $1,200 bonus and $900 gift, or a total of $28,500, times 2 for the annual amount of $57,000.               

(Notice that this is true even though your income for the 2015 calendar year would be less than the $56,000 median income amount. The extra income in December of the $1,200 bonus plus $900 gift, plus the regular paycheck gross income of $52,800, would total only $53,900. But these extra bonus and gift amounts in December are in effect doubled when coming up with the annual amount if the case is filed in January, resulting in being over the median income amount.)

So, under these facts, filing on or before December 31 you would result in passing the means test, while on or after January 1 you would not pass the means test based on your income. (You may or may not eventually pass the means test based on your allowed expenses or other factors, but there’s at least a significant risk that you would not, and so could not complete a Chapter 7 case.)

The Bottom Line

A Chapter 13 filed for reasons that it was designed for is often well worthwhile. It can save a home from foreclosure, enable you reduce and pay income taxes, and do many other things. But to be forced into Chapter 13 for 3 to 5 years for no reason other than for failing the means test because of bad timing would be very unfortunate. So see an experienced bankruptcy attorney as soon as you can to determine what’s best for you, including the best timing.

 

Bankruptcy Timing and the Holidays

December 7th, 2015 at 8:00 am

Filing bankruptcy in December instead of January can make the difference between qualifying for Chapter 7 and being forced into Chapter 13.

 

If you have a serious debt problem, you may be doing your best during the holiday season to work around it. You feel you need to get through the next few weeks and then you can deal with it early next year.  It’s hard to find the time to get the holiday obligations taken care of much less find the time and attention to focus on what you should do about your debts.

But it may be worthwhile to find that time and attention.

Bankruptcy Timing Laws

Bankruptcy has many timing rules. Some of those rules can give you major advantages if you filed your bankruptcy case even just a few weeks sooner. Or you may be able to get advantages by filing later. But you wouldn’t know if you didn’t get legal advice about it. Getting that advice sooner rather than later can make a huge difference. Here’s one reason why.

Taking Advantage of the Income Timing Laws in the “Means Test”

The means test essentially determines whether you can file a Chapter 7 “straight bankruptcy” or instead must do a Chapter 13 “adjustment of debts.” The biggest practical difference between the two is that a Chapter 7 case is almost always done within 4 months while a Chapter 13 case lasts 3 to 5 years.  

The purpose of the means test is to require those who have the “means” to pay a meaningful amount back to your creditors. If you are considered under the means test to have the means to pay something, then you are required to do so, basically by being forced into a Chapter 13 case.

Most people who need to file a Chapter 7 case successfully pass the “means test.” The easiest way to do so is to have no greater “income” than the appropriate “median income” for your state and family size. It’s the very specific and rather unusual way “income” is calculated that creates the potential timing advantages and disadvantages.

The Unusual Definition of “Income”

For purposes of the means test:

1) Almost all sources of money are counted as “income,” not just what you might normally think of as income. It usually includes, for example, cash gifts from any source and bonuses from your employer.

2) The period of time during which your income is counted for the means test is precisely the last 6 FULL calendar months before the date of filing bankruptcy. So, this excludes income received more than 6 months ago (such as any bonuses or other sources of money received during most of the first half of this year–as of mid-December when this is beingwritten). “Income” also excludes any money received during the actual calendar month during which your case is filed.

So, for example, if you filed a Chapter 7 case on December 29 of this year, “income” for purposes of the means test would include all money received from precisely June 1 through November 30 of this year. It would exclude money received before June 1 or any time in December.

The Consequences of this Unusual Definition of “Income”

So if you receive a chunk of money anytime in December—say an annual bonus from your employer, or a gift from a parent to help you buy Christmas gifts for your kids—it is not counted for the means test as long as you file your bankruptcy case by December 31. Again, for Chapter 7 cases filed anytime in December, only count money received during the 6 prior full calendar months—June through November.

So in the right situation, the timing of filing a bankruptcy case can make the difference in qualifying for Chapter 7 or not. It can make the difference between passing the means test and writing off all or most of your debts in a Chapter 7 case within a few months from now, or being required to pay as much as you can to your creditors in a Chapter 13 case for the next three to five years.

In our next blog post we’ll show you through an example how this actually works.

 

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