Here’s an example showing how the means test can work for you, especially if you file your Chapter 7 case before the end of 2018.
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 pass the “means test.” That enables you to 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.
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. With the help of your Louisville bankruptcy lawyer 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.