If you recently lost your high-paying job, delaying your bankruptcy filing can make it easier for you to qualify for Chapter 7 bankruptcy or pay a lower dividend to unsecured creditors in a Chapter 13 bankruptcy. Read on to learn more about why it may be a good idea to delay your bankruptcy after losing a high-income job.
(Check out our Bankruptcy topic area to learn how Chapter 7 and Chapter 13 bankruptcy work, get information on filing for bankruptcy in your state, and more.)
Your Income and the Bankruptcy Means Test
The bankruptcy means test plays a role in both Chapter 7 and Chapter 13 bankruptcy. Its main purpose is to determine whether you qualify for Chapter 7 or how much you should be paying unsecured creditors in Chapter 13 bankruptcy. To do this, the means test averages your gross income for the six months prior to your bankruptcy and compares it against the state median for a similar household.
If your six-month average is below the state median, you automatically pass the means test without having to fill out the rest of the form. However, it is above-median, you need to complete the entire form and disclose your expenses to determine whether you pass. As a result, if you file for bankruptcy immediately after losing your high-paying job, you may still have too much income to pass the means test.
(For comprehensive information about bankruptcy's means test, see our Means Test area.)
Waiting to File Your Bankruptcy Can Help You on the Means Test
Since the means test averages all income you received in the six-month period prior to your bankruptcy (ending on the last day of the month preceding your filing), each month you wait can reduce your means test income. This means that if your current income is much lower, even waiting a few months can decrease your six-month average enough to pass the means test.
Example. Greg was just laid off from his job at the bank. He had been working there for two years and making $72,000 per year ($6,000 per month). He currently has no income. Greg is single and the median income for a single-person household is $45,000 per year in his state. If Greg files for Chapter 7 bankruptcy right away, there is a good chance he may not qualify because his six-month average means test income will still be $6,000 per month, much higher than the state median. However, if he waits three months before filing, his means test average will now be $3,000 per month ($36,000 per year), allowing him to automatically qualify for Chapter 7 bankruptcy. This is because in the six months preceding his bankruptcy, Greg would have earned $6,000 a month for the first three months but no income for the last three, which averages to $3,000 per month.
What If You Must File Immediately?
If you can’t delay your bankruptcy, you may still have a chance at passing the means test. Bankruptcy courts have discretion to consider special circumstances and unusual changes in income when deciding whether you qualify for Chapter 7 bankruptcy. Further, in Hamilton v. Lanning, the Supreme Court recently decided that courts are allowed to consider changes in income and circumstances when calculating projected disposable income in a Chapter 13 case.
However, this still requires presenting evidence and explaining your circumstances to the satisfaction of the court. Also, your success may vary depending on the assigned judge. As a result, if you are able to, consider delaying your bankruptcy long enough to pass the means test outright after losing a high-paying job. Or talk to a local bankruptcy attorney -- an experienced lawyer might know how local bankruptcy judges treat these types of situations.
To learn more, see the artilces and Q&As in Timing Your Bankruptcy Filing.