New Yorkers filing bankruptcy often choose Chapter 7 given its speed and effectiveness at discharging unsecured debt, especially credit card debt. Although Chapter 7 can be quite beneficial, not everyone is allowed to use it.
Before Congress passed the Bankruptcy Abuse Prevention Consumer Protection Act of 2005, anyone could use Chapter 7 regardless of their incomes. After the law changed, however, people were required to pass a “means test” that required their income over the previous six months was below a certain threshold as determined by state living standards. Banks justified this law on the grounds that people with high incomes were abusing Chapter 7 by discharging debts they could actually afford to pay off.
The Chapter 7 means test places the burden on the debtor to prove on his or her petition that his or her gross income (minus Social Security payments and benefits to victims of terrorism or war crimes) is below the threshold. “Income” in this case is quite broad, even more so than how the IRS defines it.
Consequently, we run into a common problem: What happens if a friend or family member gives you a gift or a loan during the six-month period before you file? And what happens if the gift or loan takes you over the threshold?
If your friend or family member gave you money without requiring you to promise to pay you back, then the law will see that as a gift under Chapter 7. This gift will be income on your petition, counting towards the threshold of the means test. If you took out a loan from your family member or friend, the court will not count it towards the threshold, but it will require you to list the acquaintance as a creditor on your bankruptcy petition. If you omit the creditor, you will suffer the consequences, and if you repay the loan to your acquaintance before your other creditors, the bankruptcy court will consider it a preferential transfer, which may hurt your case.
As to our second question: If you received a gift in the six months before you filed and it surpasses the means test threshold in New York, you will be ineligible to file under Chapter 7 and will have to file under Chapter 13. These nuances in the bankruptcy code are reasons to seek the counsel of an experienced New York bankruptcy attorney before beginning your bankruptcy process.
For more questions about bankruptcy, please feel free to contact experienced chapter 7 bankruptcy attorney Brooklyn NY Bruce Weiner for a free initial consultation.
