The 2005 Bankruptcy Reform Act is well-known for introducing the “means test” to Chapter 7 filings. Now, Chapter 7 filings require the petitioner’s average income over the previous six months to be below the median for the state in which he or she resides. If the debtor’s average income was above this median over that time period, the filing is presumed by law to be abusive and the debtor must refile in Chapter 13. The purpose is to ensure that people don’t frivolously discharge debts that they can actually afford to pay. The next problem, though, is whether the means test can be “gamed” to produce a favorable Chapter 7 filing.
One would think bankruptcy courts would look down on this with disdain, but in reality they don’t. In 2008, one individual lost his job but found a higher-paying one later. He promptly filed in Chapter 7 and was able to exclude his income from the first month at his new job. The Trustee cried foul, but the court sided with the debtor (though his filing was dismissed for other reasons). Petitioners are allowed to “maximize their rights to the extent allowed in the law.” (In re Hageney, 2009 WL 5217674 (Bky.E.D.Wash. Dec. 31, 2009)).
With that, here are a few strategies to consider when timing the means test.
(1) File earlier if you know you will obtain greater income in the near future. This is what happened in Hageney.
(2) Recognize that some income counts towards the means test and some don’t. Teachers, for example, are considered unpaid through the summer, so if they’re filing bankruptcy, it’s a good idea to include the summer months in the six-month window.
(3) Likewise, it’s the “average” income, not the median that counts. If you make a lot of money one month or season out of the year, such as if you’re a small businessperson who does seasonal work, file outside that season.
People who have large debts should deal with them as responsibly as possible, but that doesn’t mean they must file when it is at their disadvantage. This is why consulting with an experienced Las Vegas bankruptcy lawyer earlier to discuss the best way of proceeding with your debt problem is better than doing so later.
For more questions about bankruptcy in Las Vegas, please feel free to contact an experienced Freedom Law Firm Las Vegas bankruptcy attorney for a free initial consultation. Call us at 702-745-8584 to set up your free consultation.