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.
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.