Bankruptcy Timing and the Holidays: Filing in January to Qualify for Chapter 7 or Shorten Chapter 13 Case

 Posted on December 28, 2015 in Pre-bankruptcy Planning

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.