Personal Bankruptcy Tips: Timing of when you file can make a difference

Looking at a relatively recent court ruling, it turns out that the timing of when you file bankruptcy could be very important and change the way your bankruptcy ultimately turns out.

The new bankruptcy laws – which changed in 2005 – established that if you successfully time when you file for bankruptcy, you may be able to "leave out" income from the six month income window required by the means test. Meaning that if you time it right, you might be able to exclude some of your income, and in doing so, qualify for Chapter 7 bankruptcy instead of Chapter 13 based on this exclusion. This type of practice of using timing to your advantage when you file was questioned in court by the U.S. Trustee in a Washington bankruptcy case in December 2009. The Bankruptcy Law Network reported on this ruling and the report is summarized below.

In the case, the debtor was self employed as an insurance agent and broker until late summer of 2008. In August 2008 he became an independent contractor with American General Insurance and was paid $8,000 a month, which was significantly more than he was making when he was self employed. The debtor filed Chapter 7 bankruptcy on October 30, 2008. In doing so he was able to exclude his October income from the calculation of the means test’s six month income. This exclusion had the result of allowing the debtor to qualify for Chapter 7 since his income was low enough. Had he included October income, it would have bumped him into the category of a Chapter 13 filer.

The U.S. Trustee that brought this case to court claimed that how the debtor timed his Chapter 7 bankruptcy filing was in "bad faith." As suggested above, if the debtor had waited until November 1st to file for bankruptcy, then October’s income would have been included in the means test. If this was the case, the presumption of abuse would have arisen and the debtor may have not qualified for Chapter 7 – and would have instead had to do a Chapter 13 (debt reorganization).

How did the court rule in this matter? The court did not agree with the U.S. Trustee that the debtor wrongly manipulated the means test. The court determined that bankruptcy law allows a debtor to choose the date that they decide to file a bankruptcy case. People involved in a lawsuit are allowed to get the most out of their rights to the extent that law allows. Because of this, the debtor in the case was found to be exercising his rights in a legal manner, not in bad faith.

This outcome of this case provides an important precedent for when it comes to planning for the means test. If this judgment holds, then the date you file for bankruptcy can potentially be timed to benefit you – and can potentially put you in the Chapter 7 bracket rather than the Chapter 13 bracket. Of course, this would only work in particular situations like the one mentioned above; this would obviously not work for everyone thinking of filing bankruptcy.

Consult with an attorney before deciding when to file to make sure you are getting the most out of your rights. But also, please be sure to learn all you can about Chapter 7 and Chapter 13, so that you know which type works best for you. Some debtors want to file Chapter 13 over Chapter 7, since there are some benefits (like being able to hold on to some particular assets, for example).