Bankruptcy Timing and the Holidays

 Posted on December 07, 2015 in Qualifying For Bankruptcy

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.