I’m speaking mainly to those who know that they need to file a Chapter 7 bankruptcy case. If you wait until you are back to work for several months and everything is going well again (except for what is now the older debt), you run the risk of becoming ineligible to file a Chapter 7 case. Eligibility is not based on how much debt you have – it’s based on your household income for the past six months and whether or not you have any “disposable” income that could go toward paying some or all of your unsecured debt. The court looks at the past 6 months of your income, compares it to certain qualified expenses, and determines what is left over (your disposable income) that could go toward paying your other debt. This process is called the Means Test.
For example, today I met with a newly married couple and they both were out of work for several months. When things were bad, they did some research online about bankruptcy, talked to some friends, and pretty much knew that a Chapter 7 would be their best bet to pull out of this bad situation. Their credit card bills, medical bills, and various other unsecured debts were all past due, but they had managed to keep their house and car payments current. In this instance a Chapter 7 would be their best option. They did well in their research and friends had pointed them in the right direction, to my office. They both got hired at really good paying jobs. However…..they waited and put off contacting me. They didn’t have any idea how important the timing of the Chapter 7 bankruptcy filing would be. The hardest job I have is convincing people to come and see me early, sooner rather than later. Many times we just talk and make plans to file later on. But at least they would have the information and knowledge about what they need to do and when to do it.
They both had found good jobs and had been back to work for 8 months before coming to see me about filing their Chapter 7 bankruptcy case. When we put their information through the Means Test, which looks at the last 6 months of your income, they were not eligible to file a Chapter 7. They made too much money. Had they come to see me earlier, I could have consulted with them and laid out a plan that would have had them filing when they were still eligible – when their 6 month income history would have consisted of three months of no income to offset the three months of high income.
Now their best option, based on their current circumstances and eligibility, is to file a 5 year Chapter 13 bankruptcy case to stop the lawsuits and garnishments headed their way. They must pay back a certain percentage of the unsecured debt in the Chapter 13. This unsecured debt that they could have completely written off in a Chapter 7 case. Don’t get me wrong – there is nothing wrong with paying your debts; whether it be in full or a partial amount through a Chapter 13. But this can put a hardship on a family trying to get back to even and gain a fresh start that would not have had to be there if proper planning had taken place. It’s always best to have the decision in your hands as to what you can or cannot pay rather than it being the hands of the court.
A Chapter 7 Means Test saying that you can afford to pay back unsecured debt does not necessarily match reality. If you are experiencing financial difficulty – it’s important to speak with a bankruptcy attorney NOW. Not so that you can file something right away, but so that you will know what to file and when. Maybe it would be best to file right away but maybe it would be best to obtain new employment first or get through this period of illness first or let whatever else may be causing this financial trouble run its course so that you gain the maximum benefit from filing bankruptcy. I can give you the information you need to decide what suits you the best.