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).
Filed under Getting started, the means test by 
In a previous post we discussed the problems that can arise from paying off tax debt with a credit card. Now, however, we will discuss the opposite, using money gained from your tax return to pay off debt – personal loans or credit card debt, for example. While the former is a bad idea (see the blog post for reasons why), the latter can be a good practice.
With spring comes the much anticipated tax return. Many people look at the tax return as extra money and a means to splurge a little on themselves. It is rarely thought of as a means to pay off debt. While splurging on yourself is much more enjoyable at first, I recommend looking into paying off personal loans or other debt, like credit card debt. However, once you have made the decision to do this, there are some things to keep in mind about these different types of debts which may influence your decision as to which ones you will pay off and how you will pay them off (i.e. will you pay off your debt all at once or in installments over time, etc.). Here are some factors to keep in mind:
Using your tax return to pay off personal loans
Some personal loans have an early payment penalty, which means if you pay your personal loan off early you are charged a fee. This is common with large secured loans like mortgage loans or student loans. Also, borrowers with bad credit history sometimes have an early payment penalty on personal loans. If you do have an early payment penalty, it may make more sense to hold off and pay the loan off as scheduled, rather than using your tax return to pay it off all at once.
Using your tax return to pay off debt (like credit card debt)
If you are thinking about using your tax return to pay off debt, it may be a good idea to pay off the debt that has the highest rate of interest, such as paying off high interest credit card debt before paying off your lower interest personal loan. However, the Credit CARD Act of 2009 says that borrowers that make steady payments on their credit cards for six months may qualify for a lower interest rate. So again, you may want to pay off your debt in installments using your tax return as opposed to all at once. But if it is the case with your debt that it is much higher interest than your personal loan debt, it may make more sense to use your tax return to pay off your credit card debt and not your personal loan debt.
Reducing the amount of taxes you pay throughout the year in order to pay off your debts throughout the year
It is also possible to reduce the amount of taxes you pay throughout the year. If your return is consistently of a considerable amount, you are essentially giving the government more money than is necessary throughout the year. By figuring out how to reduce your tax payments (putting yourself in a different tax bracket, for example – through legal means of course), you can use the extra money you receive throughout the year to help pay off your debt throughout the year, and will also not be so reliant on using credit cards and personal loans.
A quick example of what this looks like: If you are a single worker (no spouse) and no one claims you as a dependent, let's say you claim 2 in the personal allowances section of your W-4 instead of 1. Both ultimately result in you paying the same amount of taxes to the government, but I believe that claiming 2 instead of 1 would result in you having more money available to you throughout the year as opposed to getting it all back at the end of the year. In any case, it is recommended that you consult a professional if you are looking to use your tax return to pay off your debt throughout the year – which can be a good practice.
Filed under Paying off debt by
A few months ago, a ruling by an Idaho bankruptcy judge said that parents with a college savings plan for their children could lose the college savings to creditors when they file for bankruptcy.
The Idaho case involved parents who had put money in to a 529 college savings account for their daughter. When the parents filed bankruptcy shortly after opening the account, the judge ruled that the account is considered part of their assets and can therefore be used to repay creditors. The judge ruled this because the parents had legal control over the funds they could theoretically use the money for reasons other than for their daughter to attend college if they so wanted to.
This ruling is important for bankruptcy filers because if they want to put money in a 529 savings account for their children, they will need to consider some safety measures to take first. Because money put into the account at least 720 days before you file for bankruptcy will most likely be protected, it is a good idea to invest early. The reason this condition is in place is so that filers don’t take advantage of the system by trying to save their assets by opening 529 accounts right before they file.
Another possible precaution to take if you are thinking of filing for bankruptcy is to keep the account in another person’s name – your child, for example. If they are also interested in adding education funds and are financially stable it can protect the account from creditors because the account is not legally yours.
The Idaho ruling does not mean that every bankruptcy judge will follow the same decision, but it brings up some issues about how bankruptcy can affect your children and lets filers know that it’s important to take safety measures to protect your children’s’ college savings funds. Contact a bankruptcy attorney to ensure that the money in your 529 account or any other college fund will be safe if you file bankruptcy.
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If you are going to file for Chapter 7 bankruptcy, you must take the “means test” first to prove that your case is not taking advantage of the system. Taking advantage of the system refers to filing Chapter 7 in order to erase all your debts EVEN THOUGH you have the ability to pay them off over time under a Chapter 13, which is more a repayment plan. If it is determined that your income is above a certain level during the means test, then you are expected to file a Chapter 13 bankruptcy, not a Chapter 7.
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.
Filed under Chapter 7, Getting started, Preparing for bankruptcy by
It can be difficult to navigate the complex legal system when filing for bankruptcy after a divorce. I want to cover some of the basics of what occurs in a bankruptcy following a divorce to help smooth out the stressful process.
On Joint Filing – Once the divorce is finalized, you and your ex-spouse can no longer file a joint bankruptcy petition. How your bankruptcy filing can affect your ex-spouse depends on which chapter of bankruptcy you choose to file.
On Dividing Belongings – When you go through a divorce you need to divide your debts and belongings between yourself and your ex-spouse. Laws vary between states so speak further with a bankruptcy attorney to find out what responsibilities you have for various debts and belongings.
On Filing Chapter 7 – If you or your ex-spouse file for Chapter 7 bankruptcy and debt that was held jointly during your marriage gets discharged, then creditors may be able to collect that debt from the non-filing spouse.
On Filing Chapter 13 – If you or your ex-spouse file for Chapter 13 bankruptcy, most debts are eventually repaid and the non-filing spouse is typically protected from having responsibility of any debt. Cosigners and co-debtors are more protected in Chapter 13 than in Chapter 7.
While bankruptcy discharges many debts, debts such as child support and alimony cannot be erased. Consulting a divorce attorney about adjusting the terms of your divorce could be a helpful option.
Filed under Shared Debt by
