Means Testing: Chicken or Egg

Permanently eliminating debt can have a HUGE impact on your financial outlook.  Our clients tell us there is nothing in the world like it.  And the fact is, Chapter 7 bankruptcy gives you the right to get rid of most of the common types of unsecured debts, including:

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  • Credit card debt
  • Medical bills
  • Bank loans
  • Credit union loans
  • Finance company loans
  • Personal guarantees
  • Debts from a failed businesses

Think about what all that can mean for you.   Eliminating debt means you get rid of the debt itself, but also the accruing interest and the penalties.   You might even be able to get rid of income tax debts that are more than three years old.  Most importantly, you get rid of the phone calls and the harassment.

But, (and here’s the big “BUT”…) you have to qualify to file Chapter 7 bankruptcy in Utah.  That where the Means Test comes in.  And, that’s isn’t a bankruptcy exam you  have to take.  Congress and the Courts use the Means Test to determine whether you qualify to discharge your debts in a Chapter 7 bankruptcy case; and, if not, what your Chapter 13 case will look like (e.g., how long it will take and how much you will have to pay).  The numbers for the test are based on data from the U.S. Bureau of Labor Statistics about the median income and standard IRS published expenses for each area of the country.

Basically, this is how it works. If your income is below the median income published by the U.S. Bureau of Labor Statistics for your household size in the area where you live, you will automatically pass the Means Test for a Chapter 7 bankruptcy. On the other hand, if your income is above the median, it takes more work to figure out whether or not you will still qualify for a discharge in a Chapter 7 bankruptcy case, based on both your income and expenses. The documents start getting rather involved…like a tax return. And if, at the end of the day, your disposable income each month under the Means Test is too high, the law automatically forces you into a Chapter 13 bankruptcy case.

Currently in Utah $52,865 is the median annual income for one earner households, $59,546 for two people, and $67,632 for three-person households.

Okay, so now given those numbers of the means test, suppose the reason you’ve fallen into financial trouble is that you or your spouse were laid off from a job. You’ve been putting off even thinking about filing personal bankruptcy in Utah, hoping to find work and get back on your feet.  The debts have continued to pile up. Then, you think you’ve finally lined up a full time job, and you’re due to start soon. But, so much time has gone by without enough income coming in that the creditors are starting to make your life miserable by calling all the time.  You’re behind on your mortgage and hoping you can “pull it out” without losing your home.

As a debt consolidation lawyer, I’ve seen this scenario play out again and again.  I call it the “chicken-or-the-egg?” dilemma. Should you go back to work trying your hardest to keep the wolves at bay until you can catch up all the back payments?  Or, should you file individual bankruptcy now, before the new job starts and while you can still qualify under the Means Test?

Once your salary starts up again, and your household income changes, you might lose the opportunity to stay below those numbers I mentioned.  Talk to an experienced bankruptcy lawyer now, before the opportunity for relief vanishes. With many of your major debts wiped away, you can begin that new job free from harassment; and instead, begin the rebuilding process with peace of mind.