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Timing the Means Test for New York Bankruptcy

Following up on a post from a few weeks ago about bankruptcy income and tax income for purposes of the chapter 7 means test, a question that can arise is: What happens if your income is irregular instead of a steady paycheck?

This is an important question because the means test compares debtors’ average earnings over the previous six months, multiplies it by twelve months and compares it to the state median family income. The test does not use the previous twelve months’ total income. Because so many people are self-employed, seasonally employed, or unemployed, it’s possible for debtors to use the six month window to their advantage. A well-timed bankruptcy can keep a debtor in chapter 7 and not chapter 13 or chapter 11.

In one example in Washington State, a debtor changed jobs in 2008 from a lower-paying one to a higher-paying one. Seizing on the opportunity of combining the five months of lower income and only one month of substantial income, he filed bankruptcy. The trustee naturally claimed the petition was filed in bad faith, but the bankruptcy court sided with the debtor holding that the Bankruptcy Code grants debtors the right to commence their actions at times that are advantageous to them. It ultimately determined that the bankruptcy was filed in bad faith for other reasons, but the point about timing the commencement of a bankruptcy proceeding is nevertheless valid. (In Re Hageney, Bky. E. D. Wash. Dec. 31, 2009. (PDF))

With that in mind, here are a few strategies for using the filing date to gain an advantage over the means test.

  • Because means test income isn’t “annual income,” unpaid months are counted as zero earnings. The most common examples are schoolteachers who don’t work over the summer.
  • Similarly, workers who have windfall months or seasons are better off waiting until a time of year when business is slower and higher incomes occurred in a distant past. The same holds true for bonuses.
  • Filing before some amount of bankruptcy-eligible income is due also works, for instance awaiting an inheritance or a tax refund.

It’s important to emphasize that simply beating the means test in itself does not mean there are other reasons the trustee can successfully allege a debtor’s petition is abusive and should be dismissed. In the Hageney case discussed above, the bankruptcy court sided with the trustee for other reasons, namely that the debtor’s prospective earnings were sufficient to repay his debts to his unsecured creditors.

Knowing when to time a bankruptcy filing is a compelling reason for hiring an experienced New York bankruptcy lawyer.

For answers to more questions about the means test, bankruptcy income, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced New York bankruptcy attorney Bruce Weiner for a free initial consultation.

Rosenberg, Musso & Weiner, L.L.P
26 Court St # 2211
Brooklyn, NY 11242, USA

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