Qualifying For Chapter 7 Bankruptcy: Timing and the Means Test
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Posted by: Rob Cohen
Filing date and chapter 7 bankruptcy
If you are considering filing a Chapter 7 Bankruptcy case, you may be surprised to learn that the date you file may determine your eligibility for Chapter 7. This is because you must meet one of two requirements to file a Chapter 7 case: (1) you must be below the median income for your state or (2) your disposable income must not exceed certain thresholds. If you are below the median income, then timing is less important, but if you are above the median income, then you will need to determine your income based on the previous six months.
Variations in income can impact chapter 7 eligibility
Most people presume that their income is consistent from month to month, but in fact, your income may vary significantly. For instance, if you receive a Christmas Bonus and file for bankruptcy within six months of receiving the bonus, your income will appear to be higher than if you had received that bonus more than six months before filing for bankruptcy. Essentially, if you filed your case shortly after receiving your bonus, the Bankruptcy Code presumes that you will be receiving that bonus every six months, even though you really receive it only once per year. Why does that matter? Because if your income in the last six months is too high, you might not be eligible for Chapter 7. If you are above the median income, the Bankruptcy Code determines your income based on the past six months, not on your actual income right now.
More subtle differences in your income can also have a substantial affect on your eligibility for Chapter 7. If you receive a paycheck every two weeks, then in a “typical” six month period, you will receive 26 paychecks. But because not all months contain the same number of days, sometimes you will receive 25 or 27 paychecks in a six month period instead of 26. If you are on the borderline of Chapter 7 eligibility, that extra paycheck can make an important difference. Timing your case to begin so that you have only received 25 paychecks in the last six months might make you eligible for Chapter 7.
Events that artificially increase income
Other events can also artificially increase your income. If you recently lost your job, you may have no actual income. But if you have worked in the last six months, the Bankruptcy Code presumes that you continue to earn the same amount as you earned in the last six months. Thus, if you earned $6,000.00 per month for three months, were laid off, and three months later filed for bankruptcy, the Bankruptcy Code averages that income and presumes that you currently make $3,000.00 per month. Of course, if you are laid off, you don’t really have an income. This presents you with a dilemma. On the one hand, if you lost your job, you may need to file for bankruptcy. But if you lost your job recently, the Bankruptcy Code may presume that you make too much money to be eligible for Chapter 7 (even though you might not really be earning any money). The key to solving this problem is determining exactly how long you must wait before filing to ensure that you are eligible for Chapter 7. You would need to wait long enough so that your average income over the past six months makes you eligible, but you might want to file on the very day you are eligible if you need immediate bankruptcy relief.
The bottom line
There is some hope that courts in the future may adopt a more realistic approach to determining your income. In a case that involved similar issues, the Supreme Court decided that in a Chapter 13, projected disposable income should reflect actual income rather than just historical income. Until courts apply this reasoning to Chapter 7 cases, however, it is critical to pay attention to the date you file your Chapter 7 case.
Rob Cohen, the Managing Partner of Cohen & Cohen P.C., is a bankruptcy attorney that practices in Colorado and Wyoming. He serves as a Chapter 7 Bankruptcy Panel Trustee, and has to date administered over 8,000 Chapter 7 bankruptcy estates. Rob is a Certified Consumer Bankruptcy Specialist, and was nominated for Denver Business Journal’s 40 under 40 in both 2014 and 2016.
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