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).

People often wonder what is involved in this so-called “means test.” The first thing you need to do to complete the means test is to determine your “current monthly income.” This is determined by finding the average of your income for the past 6 months, multiplied by 12, and then compared to the median income for families of your size in the state in which you reside. You must gather proof of any source of income from the last 6 months. On top of your pay stubs, this includes any child support, alimony, bonuses, and dividends you have received. If you are married your spouse’s income also matters even if they are not filing for bankruptcy. This is because your household is receiving support from your spouse and that money must to be available for creditors. If you run your own business you must determine your net income for the last 6 months with your gross income and business expenses.

Once you have then determined your current monthly income, that’s when you compare it to your state’s “median family income.” The median family income for your state is determined by the US Census Bureau by looking at the income level in every state where half the families make more and half the families make less. The median family income is also determined by the size of your family – since larger families are expected to have higher income numbers. Thus, every additional individual in the family increases your median family income. For example, if you have a family of three people you are considered to have a higher median family income than if you were a family of one.

In the end, the means test determines whether you are above or below a certain point – financially speaking. If you are above that certain level, then you will have to file for Chapter 13 and repay your debts over a period of 3 to 5 years (not the best news if what you’re looking for is a quick and painless elimination of debts). But if you are below that certain income level, then you will be able to proceed with your Chapter 7 filing.

The means test can be confusing to the common filer, but an experienced bankruptcy attorney knows all about it and can be very helpful in helping you to complete the means test. It is one of the first steps the lawyers here at Clark and Washington take in filing your bankruptcy.

To avoid digging yourself into such a deeper financial hole by not filing for bankruptcy, it is important to know signs that show that filing for bankruptcy may be better to do sooner than later:

1) If you are borrowing money to pay your debts, it is a warning sign that bankruptcy may be a better option. Using one credit card to pay another, depending on payday loans, or asking family and friends for loans can all dig you into a deeper hole.

2) If you use your retirement funds to pay your debts. Often your retirement accounts are exempt from creditors in bankruptcy court and would be heavily taxed if you take it out early.

3) If you are experiencing increased stress and pressure, bankruptcy can potentially relieve that. Debt can put tension on relationships with family and friends, as well as your state of mind.

4) If you are unable to pay minimum payments on your debts, it may be time to file bankruptcy.

5) If you are constantly selling your stuff for cash in order to pay your debt. This is another bad sign. While it can be good to sell unnecessary items you have acquired, if you are giving up things that are valuable to you, it could be a problem.

6) If you are constantly contacted by bill creditors, filing for bankruptcy can end their communication.

Every financial situation is different and it’s important to understand the best option for you. Filing for bankruptcy can give a debtor a chance to start over financially and put an end to the stress. I recommend contacting a bankruptcy attorney if you’re experiencing any of the above-mentioned warning signs.

Here is our answer: the bankruptcy laws are very specific that you must include all of your debts when you file for bankruptcy.  You cannot include some bills and leave others out.  Realize that notice of your bankruptcy will shortly be included in your credit files so it is almost certain that all of your creditors will find out about your filing anyway.

We strongly urge you to provide your bankruptcy lawyer with a copy of your credit report and to advise your lawyer about all of your debts.  Full disclosure will result in your best bankruptcy results.

With the opening of these two offices, Clark and Washington now has seven (7) convenient offices in the Tampa area.  As always, telephone and office consultations are offered at no charge and most cases can be filed for the filing fee only.

Call us at 813-345-5954 for an appointment or for more information.