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Archive for the ‘qualifying for Chapter 7’ tag

An Example Why Passing the Means Test May Be Easier in 2018

November 19th, 2018 at 8:00 am

Filing bankruptcy before the end of December may help you qualify for Chapter 7 bankruptcy. Here’s an example showing how this could work.  

 

The month of December is the month that people receive more income than any other month of the year. According to the federal Bureau of Economic Analysis (part of the U.S. Department of Commerce), for at least the past 9 years (2009 through 2017) U.S. personal income was the highest in December than in any other calendar month.

This may well be true for you personally. You may work a part-time seasonal job this time of year to help make ends meet. You may be getting a few larger paychecks because of more work hours or overtime. Or you may be fortunate enough to get a holiday or year-end bonus.

Last week’s blog post explained how filing bankruptcy during December can be smart if you receive extra income that month. It can help you qualify for Chapter 7, and avoid being forced into a 3-to-5-year Chapter 13 case. Today we lay out an example to show how this would work.

The Example

Let’s assume that the median income amount for your family size in your state is $64,577.

(That’s the current amount for a family of 3 in Kentucky. You can find the median income amount applicable to you on this chart. It’s from the means testing webpage of the U.S. Trustee Program. The chart is current for bankruptcies filed starting November 1, 2018, and is updated about three times a year.)

Assume that your regular family monthly gross income is $5,000, which would give you an annual income of $60,000. That’s less the median income amount of $64,577 provided above. So you’d think that you’d easily pass the means test.

But let’s also assume that you and/or your spouse were to receive an extra $2,500 during December. This money could be from a seasonal job, overtime, a bonus, or just about any other source.

Filing Bankruptcy During December

What would happen here if you filed a Chapter 7 bankruptcy case during December? The income that would count for the means test would be what you received during the six full calendar months before the date of filing. You don’t count anything received in December; only income during June through November counts.  That would be 6 months of $5,000, or $30,000; multiply that by two for an annual income of $60,000.  

Since $60,000 is less than the $64,577 applicable median family income amount, you’d handily pass the means test. You’d qualify to file a Chapter 7 case.

Waiting to File Bankruptcy After December

If instead you tried to file a Chapter 7 case in January, your income under the means test would be higher. The pertinent 6-month full calendar month period would now be from last July through December.  On top of the usual $5,000 income for 6 months—$30,000—you’d add the extra $2,500 money received in December. So the 6-month total would be $32,500. Multiply that by two for an annual income of $65,000.

Since $65,000 is more than the $64,577 applicable median family income amount you’d not immediately pass the means test. You may not qualify for filing a Chapter 7 case. Instead of likely being able to discharge (legally write off) many or possibly all of your debts within about 4 months you may be forced to pay on them for 3 to 5 years in a Chapter 13 case.

Having Income More Than Median Family Income

Even in this scenario of too much income, there’s a chance you could still pass the means test and qualify for Chapter 7. You’d complete the very complicated 9-page Chapter 7 Means Test Calculation form. Then if your “allowed expense deductions” leave you with too low of “monthly disposable income” you’d still pass the means test. (Whether your “monthly disposable income” is low enough turns on a formula comparing that amount to the amount of your “total nonpriority unsecured debt.”) Or you might also qualify for Chapter 7 by having expenses that qualify under “special circumstances.”

But these alternative ways of trying to qualify for Chapter 7 are much riskier than simply having less income than your applicable median family income amount. Our example above shows how to accomplish this with smart timing. You may be able to do the same by simply filing your case in December, or in whatever month would be most favorable for you.

 

Simple and Not-so-simple Debts in Chapter 7 and 13

November 24th, 2017 at 8:00 am

Very broadly speaking Chapter 7 handles simple debts as well or better than Chapter 13 does, which handles more difficult debts better.


Debts in Bankruptcy

When deciding between Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” you look at many factors. You have to meet certain qualifications (usually easy to meet) to file either one. The amount of your income, the nature of your assets, whether you own a business, and your immediate and long-term goals—all of these come into play.

But the most important consideration is your debts. Bankruptcy is of course mostly a tool for dealing with your debts. Chapter 7 and Chapter 13 each deal better than the other with certain types and combinations of debts.

Today we get into which of these two consumer bankruptcy options is better for which debt scenarios.

A Helpful Starting Point

Our first sentence gives us a good starting point. Chapter 7 handles simple debts as well or better than Chapter 13 does, which handles more difficult debts better.

So if you have mostly or all simple debts, then Chapter 7 will tend to be better for you. If you have a number of difficult debts, Chapter 13 will more likely be better.

The Different Types of Debts

There are basically three types of debts:

  1. General unsecured—There’s no collateral or “security” tied to these debts (“unsecured”), and they aren’t “priority”—given special treatment in the law. General unsecured debts include most credit cards, medical debts, no-collateral personal loans, utility bills, back rent, and many, many others.
  2. Secured—The debts are legally tied to collateral or with a lien on something of value. Included are home mortgages, vehicle loans, retail debts secured by the goods purchased, personal loans secured against personal possessions, business loans secured by business and/or personal assets—all debts secured by anything you own.
  3. Priority—Simply, debts that the law treats as special for whatever policy reason. The main examples for consumer debtors are recent income and other taxes, and child and spousal support.

These different types of debts are treated differently in Chapter 7 vs. Chapter 13.

Debt Scenarios Handled Well by Chapter 7

If ALL your debts are general unsecured debts, Chapter 7 will more likely be your better option. Most general unsecured debts are discharged—legally written off—in a Chapter 7 case. So you file a Chapter 7 case through your bankruptcy lawyer in usually less than 4 months all your debts are discharged. You have your fresh financial start.

Some secured debts are handled reasonably well in a Chapter 7 case. If you are current on a home mortgage or vehicle loan, you can usually keep your home or vehicle by maintaining your payments and “reaffirming” the debt. If you are very close to being current, you may be able to catch up and “reaffirm” as well. If you are surrendering a home or vehicle (or any other collateral) Chapter 7 often works well for that.

Chapter 7 may be appropriate for dealing with certain limited priority debts. If you owe an income tax debt or are behind on child support, discharging all or most of your other debts may enable you to catch up on the tax or support. But you are subject to collection actions by the tax authorities as soon as your Chapter 7 is over. And as for support debt, a Chapter 7 filing does not stop its collection even while your bankruptcy case is active. So if you owe any tax debt that you can’t comfortably pay through a standard IRS/state payment plan, Chapter 13 may be the better option. And if you are behind on child or spousal support, only Chapter 13 can stop the aggressive collection actions that an ex-spouse or support collection agencies can use against you.

Debt Scenarios Not Handled Well by Chapter 13

If ALL your debts are general unsecured debts, Chapter 13 is usually not your better option (assuming you have a choice). That’s because unlike Chapter 7, in a Chapter 13 case you usually have to pay a portion of your general unsecured debts. You pay as much of those debts as you can afford to do so over a 3 to 5-year period. Then the portion you did not pay gets discharged.

It’s important to understand that the general unsecured debts are often paid relatively little in a Chapter 13 case. It’s common that you’d pay only 5 or 10 cents on the dollar, and almost always no interest or penalties. In many parts of the country you can even pay 0 cents on the dollar. That’s because the debtor owes secured or priority debts which use up all the money he or she can afford to pay.

Debt Scenarios Handled Well by Chapter 13

Chapter 13 deals with secured debts often better than does Chapter 7. That’s especially true if you’re behind on a debt with collateral you really want to keep. Under Chapter 7 you’d usually have to get current on a vehicle almost immediately to be able to keep it. You have many months—or even a year or two—to catch up under Chapter 13. If you’re behind on your home mortgage you get up to 5 years to catch up.

Chapter 13 also gives you some very powerful tools for dealing with secured debts unavailable under Chapter 7. You may be able to “strip” a second or third mortgage off your home’s title. You may be able to do a “cramdown” on your vehicle loan or other personal property debt, potentially greatly reducing your monthly payment and the total you pay.

With priority debts, Chapter 13 gives you tremendous power and flexibility. It stops collection of support arrearage, and gives you months or years to catch up—as long as you keep current on ongoing support. With unpaid income taxes Chapter 13 provides many benefits. It prevents future tax liens. It enables you to deal with prior-recorded tax liens extremely well. Chapter 13 gives you up to 5 years to pay taxes that can’t be discharged. Usually throughout that time you pay no ongoing interest or penalties.

Conclusion 

It’s a bit of an oversimplification to say that simple debts lead to Chapter 7 while more complicated ones lead to Chapter 13. But, as we’ve just shown, that’s often the situation.

But just as you are a unique human being, your circumstances are unique. Get the unique assessment of your options that you need from an experienced and empathetic bankruptcy lawyer.

 

Chapter 7 or 13? You May Be Surprised

November 15th, 2017 at 8:00 am

Chapter 7 takes about 4 months, while Chapter 13 takes 3 to 5 years, and likely costs more. But that doesn’t begin to answer which is better. 

 

Chapter 7 and Chapter 13

Chapter 7 “straight bankruptcy” is usually, but not always, for simpler situations. It’s often the right choice if your income is relatively low, your assets are modest, and your debts are straightforward.  You keep all of your assets, all or most of your debts are discharged (legally written off), and if you want you keep paying on your vehicle and/or your mortgage or rent.

Chapter 13 “adjustment of debts” is usually, but not always, better for somewhat more complicated situations. Your income may be too high to qualify for Chapter 7. You may have an asset or two that is not “exempt”—not protected. Or you may have debts much better handled under Chapter 13. Do you owe income taxes or student loans or a second mortgage? Are you behind on a vehicle loan, home mortgage, property tax, or child or spousal support? These and certain other kinds of debts are often handled much better in a Chapter 13 case.

Overall, these two options each have advantages and disadvantages that need to be carefully matched to you and your goals. Chapter 7 may be able to solve immediate problems and do so quickly. Chapter 13 is more expensive but that can be far outweighed by the money you save over using Chapter 7. In some situations the unique tools of Chapter 13 can save a person many thousands of dollars. Chapter 13 takes so much longer but that length can itself be an advantage. When you need or want to pay a special debt, you can stretch payments out to lower their monthly amount. So it just depends on your personal situation.

Be Flexible When You Meet with your Lawyer

You’re reading this blog post, so we’re glad that you’re working on getting informed about your options. But it’s also important to have an open mind when you go to see your bankruptcy lawyer for legal advice. If you do inform yourself in advance you may tentatively decide which option is best for you. Or you may just not know. It is easy to not be aware of a crucial advantage or disadvantage that could be decisive. So don’t be too convinced about going with one option when the other may actually be better.

Sometime Easy, Sometimes Difficult Choice

The reality is that sometimes it’s pretty clear which option is better for you. Sometimes you only qualify for one of the two. Or your circumstances can push your decision strongly towards either Chapter 7 or 13. In these situations, you may have an easy choice.

But often you qualify for both. It’s not unusual that each gives you some advantages and disadvantages that the other doesn’t. Especially in these situations it’s crucial to know all these advantages and disadvantages in order to make the best choice.  Then it comes down to a deeply personal decision based on what goals and benefits are most important to you.

To Help You Be Informed

It IS good to be as informed as you much as your time and energy allows. This choice between Chapter 7 and Chapter 13 is very important. So during the next few weeks we’ll look at the differences between them.

 

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.

 

No Means Test If You Fit within a Military Exemption

June 28th, 2017 at 7:00 am

There are two military-related exemptions from the Chapter 7 means test. They are narrow but if you qualify that can be a major advantage.


The Benefit of Avoiding the Means Test

We introduced the “means test” two blog posts ago. This test determines whether you qualify for a Chapter 7 “straight bankruptcy” or instead must do a Chapter 13 “adjustment of debts” case. It’s based on your income, or if your income is not low enough your expenses play a part as well.

Although most people who want to file under Chapter 7 could pass the means test, not everybody could. For them being able to skip the means test can be a very big deal. A Chapter 13 case requires you to pay your debts to the extent your budget allows for a period of 3 to 5 years. In great contrast, a Chapter 7 case usually “discharges” (legally writes off) most debts without you paying anything.  And the cases usually only last about 4 months.

So if Chapter 7 is what you need, you can see why skipping the means test could be very important.

Completely Avoiding the “Means Test”

The two exemptions from the “means test” related to military service are:

1) the disabled veteran exemption, and

2) the active duty/homeland defense exemptions.

The law clearly states that under these exemptions you can completely avoid the means test.  It says that “the [bankruptcy] court may not dismiss or convert [into Chapter 13] a case based on any form of means testing” if either of these exemptions apply. (See Section 707(b)(2)(D) of the Bankruptcy Code.)

1) The Disabled Veteran Exemption

You can avoid the “means test” under this exemption by meeting two conditions:

First, you are “disabled veteran.” This means that either

a) you are entitled to veteran disability compensation by being least 30% disabled; or

b) you have been discharged from service, or released from active duty, because of “a disability incurred or aggravated in line of duty” (as defined in 38 U.S.C. Section 3741(1)).

Second, your “indebtedness occurred primarily during a period” in which you were either:

a) on “active duty,” meaning “full time duty in the active military service of the United States” (10 U.S.C. Section 101(d)(2)); or

b) “performing a homeland defense activity.” (See definition in 32 U.S.C. Section 901(1).)

On a practical level this second condition seems to be a challenging one.

Think about it. Let’s say you incurred most of your debts before you joined the military, then became disabled while on active duty. So if you then couldn’t pay your debts and needed to file bankruptcy, this exception wouldn’t apply. Your “indebtedness” would not have “occurred primarily” during your active duty but rather before it.

Or let’s say if you didn’t have much debt when you went on active duty. But then you became disabled while on active duty. If you then incurred most of your debt AFTER being released from active duty because of your disability, your “indebtedness” would not have “occurred primarily” during your active duty but rather after it.

In either of these situations you’d still have to pass the means test to go through a Chapter 7 bankruptcy. You don’t if your “indebtedness occurred primarily” while you were on active duty.

2) The Active Duty/Homeland Defense Exemption

This second exemption is much broader. Unlike the above, the timing of your debts in relation to the time of your service does not matter. But this exemption from the means test comes with a very quick deadline to qualify for it.

You are exempt from the means test if at any time after September 11, 2001 you were (or still are) a member of the Armed Forces or the National Guard who served either in active duty or for the homeland defense for a period of at least 90 days. See Section 707(b)(2)(D)(ii) of the Bankruptcy Code.

To use this exemption you must file your Chapter 7 bankruptcy case either:

  • during your term of duty, or
  • within 540 days (about a year and a half) after it ends.

Conclusion

The disabled veteran exemption requires your indebtedness to have “occurred primarily during” your period of service. With the active duty/homeland defense exemption, to use it you must file your Chapter 7 case during or within 540 days after completing your service. Ask your bankruptcy lawyer whether you can skip the means test by fitting within one of these two exemptions.

Again, even if you don’t think you qualify for either of these exemptions, remember that most people needing to file a Chapter 7 case can pass the “means test” and so don’t really need an exemption from it.

 

No Means Test If You Have More Business Debts than Consumer Debts

June 26th, 2017 at 7:00 am

You only have to pass the means test if you have “primarily consumer debts.” If you have more business debts, skip the means test.  


The Consumer “Means Test”

Our last blog post introduced the “means test.” It’s used to see if you qualifying for Chapter 7 “straight bankruptcy.” If you don’t qualify, you may instead have to file a Chapter 13 “adjustment of debts” case requiring a 3-to-5-year payment plan.

But the means test only applies to consumer bankruptcy cases. Otherwise you can skip the means test.

The official Voluntary Petition for Individuals Filing Bankruptcy form asks the following two questions:

16a. Are your debts primarily consumer debts? Consumer debts are defined in 11 U.S.C. § 101(8) as “incurred by an individual primarily for a personal, family, or household purpose.”

16b. Are your debts primarily business debts? Business debts are debts that you incurred to obtain money for a business or investment or through the operation of the business or investment.

If you answer “no” to the first question (and usually “yes” to the second question), than you skip the means test. This can be a significant advantage because you may otherwise not qualify under Chapter 7.

How this Exception Fit’s into the Purpose of the Means Test

The purpose of the “means test” is to only allow you to go through a Chapter 7 case if you don’t have the “means” to pay a meaningful amount of your debts to your creditors. If your income is no more than the “median income” for your family size in your state, the law assumes you don’t have the “means” to do so. Next, if your income is more than the median amount, then your allowed expenses are carefully reviewed to see if you do have enough “means” left after your expenses.

When Congress created the means test, it decided to apply the test only to individual consumers, not to businesses and business owners.

The mechanism that Congress used to divide between consumers and business is the phrase: “primarily consumer debts.” All those with “primarily consumer debts” have to take the “means test” to qualify for Chapter 7 relief. Those without “primarily consumer debts” do not have to take the “means test.”

Not “Primarily Consumer Debts”

If the total amount of all your consumer debts is less than the total amount of all your non-consumer (business) debts, your debts are not “primarily consumer debts.” If so, you can avoid the “means test.”

Section 101(8) of the Bankruptcy Code defines a “consumer debt” at as one “incurred by an individual primarily for a personal, family, or household purpose.”

As you add up your consumer and non-consumer debts, realize that you may have more business debt than you think for two reasons.

First, debts that you would normally consider consumer debts might not be. For example, debts used to finance your business, even if otherwise straightforward consumer credit—credit cards, home equity lines of credit, and such—may qualify as non-consumer debt based on your business purpose of that credit. (Note the explanation to the question in the bankruptcy petition quoted above, that business debts include both those incurred in funding the business and in operating it.)

Second, some of your business debts may be larger than you think. For example, If you surrendered a leased business premises or business equipment you would likely be liable not just for the missed lease payments owed at the filing of the bankruptcy but also potentially for the string of future contractual payments, depreciation, and other possible charges.

Through a combination of these two considerations, your total business debt may be much more than you expected. So you might have more business debt than consumer debt.

Conclusion

You may not be in a position—given your income and the expenses you’re allowed—to pass the means test. If you have ANY business debts, be sure to ask your bankruptcy lawyer to see if you qualify for this not-“primarily consumer debt” exception.

 

The Chapter 7 Means Test

June 23rd, 2017 at 7:00 am

You have to pass the means test to qualify for a Chapter 7 case. It’s often an easy test to pass but one with some crucial twists and turns. 


The Purpose of the “Means Test”

You need to qualify to file a Chapter 7 “straight bankruptcy” case. The “means test” is the main step in qualifying. Its purpose is to not let you file a Chapter 7 case if you have the “means” to pay a meaningful amount to your creditors. If you do, then usually you would instead have to go through a Chapter 13 “adjustment of debts” case.

A consumer Chapter 7 case generally “discharges” (legally writes off) all or most of your debts. And it does so in a process that usually takes only 3 or 4 months.

In contrast a Chapter 13 case requires you to pay as much as you can reasonably pay to your creditors over a 3 to 5 year period. That usually means that under Chapter 13 your creditors get paid at least a portion of what you owe them. Often that portion is small, and sometimes most of your creditors actually get nothing. But the point is that Chapter 7 is SO much faster and easier. IF it’s the right option for you, you want to be able to qualify. And that means passing the means test.

Usually Easy, but Watch Out for the Twists and Turns

The reality is that most people who want to file under Chapter 7 can pass the means test. And most of those who pass do so quite easily.

Here’s why. There are a number of steps to the means test. But if you pass it on the first easiest step, then you’re done. You don’t have to go through the other more complicated steps.

This first step—the “median income” step—is relatively straightforward. But it has its own oddities—its twists and turns.

The “Median Income” Step

The idea behind this first step is that if your income is low enough, you have no money for creditors. You don’t have the “means” to pay a meaningful amount to the creditors.

If your income is low enough you pass the means test simply on the basis of your income. You don’t have to compare your income to your expenses to see if you have enough left over to pay to your creditors. (That’s the second step of the means test, if you don’t pass at this median income step.)

How low does your income need to be to pass the means test at this first step?

It can’t be more than the current median income amount for your state and your family size.

Median income is somewhat like the average income but not quite. It is the income amount at which half the people of the population have a lower income while half of the people has a higher income. The median income amounts for each state and family size are updated usually two or three times a year. The most recent update as of this writing was effective as of May 1, 2017. Tables of these median income amounts are published and made available.

“Income” Isn’t What You Think

“Income” has a very special and specific meaning here. To see if your income fits within your applicable median income amount, you need to know this meaning of “income.”

First, consider only money you received during precisely the SIX FULL calendar months before the filing of your bankruptcy case. For example, assume you are filing a Chapter 7 case on any day in the month of July. Then, you only count money you’d received from January 1 through June 30 of that year.

Second, we purposely said “money” instead of “income” here. That’s because you include virtually all money you received during the applicable six-month period from virtually all sources. It’s not just employment income, or money that’s taxable and shows up on your income tax return. Include essentially all sources of funds, except those received through any kind of Social Security benefit.

Once you have the total 6-month “income” amount, multiply it by 2 to get the annualized amount of “income.” Then compare that amount to the one for your state and family size in the published table.

Timing of Filing Often Changes Your “Income”

With this particular definition of “income,” whether you are above or below median income can change by the month. That’s especially true if you occasionally get money in irregular amounts and/or with irregular timing. Examples would be inconsistent child support, an annual or quarterly bonus from work, or any kind of lump sum distribution like a disability settlement or from a vehicle accident.   

An unusual payment can artificially inflate your “income” for the means test. A gap in usual payments can deflate your “income.” These can either push you temporarily above your applicable median income or below it. Because the impact is doubled (when you annualize the 6-months of income), even a moderate change can effect whether you pass this step of the means test.

The Rest of the “Means Test”

If your income is more than your applicable median income, you go to the second step of the means test. This involves a comparison of your income and allowed expenses to come up with your “disposable income.” The twist and turn here is in calculating your allowed expenses. We’ll get into that in our next blog post.

 

Bankruptcy–A Moral Choice

April 1st, 2016 at 7:00 am

When is it moral to break your promises to pay your debts?

 

We Humans Are Moral Creatures

Your decision about whether to file bankruptcy could sensibly be just a weighing of its economic costs and benefits.            

But there’s more to life than dollars and cents. Whether in the front of our minds or nagging us in the back of our minds is the very human question: “Is it the right thing to do?”

Our important life choices are often moral ones. They are choices between doing what’s right and doing what’s wrong.

When deciding about bankruptcy you could skip that part of the decision-making process. You could make it a purely economic decision. But there’s a good chance that will leave you at least vaguely unsettled. You’ll likely feel good about the decision only after you believe in your head and heart that filing bankruptcy really was the right thing to do.

How to Make a Good Moral Decision 

1. Know what got you here.

What got you to this point of financial crisis? Over the years you made a bunch of legal commitments to your creditors to pay your debts. What has gotten in the way of you sticking with those commitments? Is there anything you would have done differently, and WILL do differently in the future?

2. Consider the moral costs and benefits of attempting to meet your financial commitments.

Don’t just look at the financial and legal costs and benefits of filing bankruptcy or not doing so—impacts on your credit record, your monthly budget, your present and future debt service.

What are the moral costs and benefits?

To the extent that you continue to struggle to pay your debts, the moral benefit is the one you likely focus on when you think about doing what’s right: you keeping your promises to pay your debts.

But consider the costs if you continue down that route.  Consider the potential detriments to your physical health from working too many hours and from the stress. Consider your emotional health. Consider how the financial pressures affect your marriage and other significant relationships. Consider what responsibilities you have to your children and other dependents, now and in the future. And consider not just financial responsibilities but the time and attention from you that they need. Extend your responsibilities not just to yourself and your family but also to your broader community.

Don’ts just focus on your moral obligation to your creditors. It’s not only appropriate but even necessary to balance that against obligations to yourself, to your spouse, to your kids, and to society in general.

3.  Focus on making a good decision now.

The past and its decisions are in the past. Accept the responsibility to make the best decisions that you can now.

This means facing your situation honestly and realistically. It is normal to be afraid to face tough realities, ones that make you feel embarrassed and even ashamed. Dealing with it challenges your self-image. Find the courage to be honest with yourself.

Avoid avoidance behavior! Otherwise you’re just staying with the status quo by default. That’s very likely not the morally best route. It’s seldom even the economically most sensible route.

4. Get legal advice about your options.

You need to know your available legal options and all the consequences of those options. Only then can you weigh your options and decide on the right thing to do—morally as well as financially.

You can’t make a good decision without knowledge. And you can’t have adequate knowledge about your options and their consequences without the guidance and advice of a dedicated professional who has spent years, day in and day out, dealing with these kinds of decisions.  

Self-education in the law only goes so far. And it’s not nearly far enough to make the right decisions, on your own behalf much less on behalf of anybody else who relies on you.  

Your bankruptcy lawyer is your legal advisor, not your moral one. So he or she will respect that the final decisions are up to you. But he or she is human, too, and recognizes that it’s a tough choice for you. Having counseled many people making these kinds of decisions, your lawyer should be able to help you find moral closure with yours. If not, find one who does.  

5.  Weigh your available options and decide.

Do whatever you know helps YOU make good decisions. Get motivational help from the right people and resources. Get past your embarrassment and talk with people whose advice you value—your genuine friends, and emotional and spiritual counselors. If it helps, write in your journal about it.

Do whatever it takes to focus on the task. Then make the decision and get it done.

 

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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