I Need to File Chapter 7 Bankruptcy When Should I File?

     The premise of this post is that the debtors in question need to file Chapter 7 bankruptcy to discharge their debts and focuses only on the timing of their bankruptcy filings. Also this post refers to the Means Test which is a qualification test and potential roadblock to filing Chapter 7 which is explained in more detail in prior posts on this Blog. The following are some common scenarios based on my experience with past clients with explanations of the appropriate filing times.

     1) Engaged Persons:

           

              A) In a situation where only one of the two future spouses has debt problems filing Chapter 7 before the marriage will be appropriate especially if the combined income of the married couple will put them over the household median and make the filing subject to the means test.  Important to remember once married even if only one spouse files the non-filing spouse's income is included in the means test. There also is the clear advantage of having the future spouse obtain the fresh start from their debts before their marriage thereby eliminating any turmoil these debts may cause between spouses.

             B) Where both parties need to file Chapter 7 it will make sense for them to file as individuals before their marriage if their individual incomes are below the household median for the means test and above if combined. If the combined incomes will not put the married couple above the median income than filing after marriage will likely make more sense as long as their monthly combined net income less their joint expenses does not leave them with too much excess income. One main reason is that they can file together as a married couple thereby eliminating the fees and expenses of two individual filings. Filing together also holds true if one future spouse due to their income cannot file individually under means test, but will qualify together with spouse who may have low income or children that will increase household size so they will avoid means test filing as married couple.

           

      2) Foreclosure Scenarios:

                A) Debtor wants to delay foreclosure and prolong stay in home. Under this scenario as long as there are no other pressing needs to file right away, for example a pending wage execution, delaying the filing till right before a foreclosure auction or on the debtor's law day if there is a judgment of strict foreclosure will maximize the additional delay bankruptcy can provide.

               B)  In a situation where the debtor is already out of the property and not interested in delaying foreclosure best to wait if possible till after title passes via the foreclosure thereby debtor's ownership interest in property terminated prior to bankruptcy along with any liabilities as property owner.           

    3)  Other Scenarios:

             A) Expecting parents may need to wait for the birth of their child to increase their household   size to bring their income below the household median to avoid the means test. There also are the increased expenses of a new born baby that in some cases will eliminate any problematic excess monthly income to qualify for Chapter 7 filing.

            B) Debtor needs to file asap. These situations include where the debtor has:

                 i) Pending Wage execution they want to stop;

                   ii) Pending Bank execution they want to reverse: 

                   iii) Pending judgment they want to avoid;

                   iv) Future income increase means test issue;                                          

                   v)  Need emergency filing to stop auction/law day;and

                   vi) Been worn down by creditor harassment

       

    The above scenarios are just some of the examples I can provide as to appropriate bankruptcy timing. One of my next posts will deal with debtors and divorce including timing and filing issues that are unique to couples at all stages of the divorce process.

       


   

When is The Appropriate Time to File Chapter 7 Bankruptcy? Part 2 Income Issues

       Although income considerations were always a factor in determining when and if to file a Chapter 7 bankruptcy the creation of the Mean Test by the amendments to the Bankruptcy Code in 2005 added more to consider in making this decision. In simple terms the Chapter 7 means test uses the IRS median income based on household size and applicable state to first determine if a debtor has to satisfy the means test in order to qualify for Chapter 7. For example for a three person family in Connecticut the current median income is $82,797.00. If the debtors' combined income for the six-month period immediately preceding a bankruptcy filing calculated on an annual basis equals less than the $82,797.00 there is no “presumption of abuse" and no need to complete the means test. If the opposite is true than the means test needs to be completed which makes the filing more difficult due to the arbitrary means test expense calculations and the strong likelihood of a United States trustee audit of the file to determine eligibility for discharge. This means in cases where debtors' incomes are close to the median income and fluctuate from month to month the timing of the filing can determine whether the means test comes into play or not.  Clearly all other factors aside the appropriate time to file is when the six month income brings the debtor below the median income to avoid the means test. This by itself will not determine whether debtors may file Chapter 7.  There are still the income and expenses schedules that need to be completed for which the income and monthly expenses for the next 12 months are projected. These schedules are based on actual figures and allow debtors to take into account recurring expenses like student loans which the means test does not.  I find that in most cases if a debtor has reached their financial bottom and reached out to me to help them that if their income falls below the means test median income they usually qualify for a Chapter 7 discharge. 

     Another factor to look at when reviewing income and the means test is the household size of the debtors. The definition of household size is not necessarily just the nuclear family. If an elderly relative or sibling with little or no income contribution to the debtors' household income lives with the debtors' family for the six month period prior to filing they can be included in household size. In some cases this increase in household size can make the difference whether the debtors have to pass the means test or not.  Finally, if it turns out that the debtors have to pass the means test it does not mean they automatically will not qualify for a Chapter 7 bankruptcy. Each case is unique and in cases where the debtors have large secured debts due to mortgages and car loans and they intend to keep these assets there is a stronger likelihood that they will pass the means test. This may also be the case where a debtor has high recurring medical costs due to a medical condition which can be viewed as a special circumstance under the means test. I had a case like this and after providing the necessary doctor reports and proof of medical expenses to the US Trustee my client obtained her discharge. These audits are not easy, but if debtors can provide the requisite documents to the US trustee to satisfy their audit they can obtain a discharge.