As the demographic of the bankruptcy filer continues to shift, I am seeing more and more means testing issues.
For those new to bankruptcy terminology, the “means test” is this kooky, confusing and often arbitrary “income test” that determines whether you qualify for chapter 7 bankruptcy and if not, what your monthly payment would be in a chapter 13 bankruptcy.
Basically, if you earn too much, you have to pay something back.
So, if you are on a fixed income such as Social Security you should easily pass the means test and qualify for chapter 7 bankruptcy right?
99% of the time, yes.
So what about that 1%?
Measly Disposable Income/Expenses
I have previously discussed that dark place I call the “bankruptcy wasteland” situated somewhere between chapter 7 and chapter 13.
Last week I consulted with a gentlemen who was about to find himself in this dreary place.
Unemployed and living off savings for the previous 3 years, he had no income but a substantial amount of debt. In just a few months, he would get some relief as his social security would kick in at the age of 62.
Social security income is exempt for means testing purposes so there would be no problem right? Wrong.
This gentleman’s monthly expenses totaled a measly $550 per month. Once his social security kicks in, he is going to have a substantial amount of disposable income at the end of each month.
Bye, bye chapter 7 bankruptcy.
Even though these numbers would indicate that he should be able to afford and complete a chapter 13, at this stage in life, it simply isn’t feasible. At the age of 62 and with no retirement savings, future financial stability is most important.
I am working fast to get this case filed before this becomes an issue.
I write this because it is important to remember that the means test is not the only factor in determining a debtor’s ability to pay back his/her debts.
This is also a reminder that nobody should tread in the bankruptcy waters without an attorney.
My client’s timing was just right in this case, but if he waited a few months longer, he could have missed his opportunity to discharge his debts and more importantly, save for the future.
Image courtesy of ChrisL_AK (Flickr).