Can You Reduce Income to Qualify for a Chapter 7 Bankruptcy?

Consumers generally have two bankruptcy options to choose from—Chapter 7 and Chapter 13. Each has different strengths and weaknesses, but a big plus of a Chapter 7 is speed. You can usually wipe out qualifying debts in a few months from start to finish. With a Chapter 13, by contrast, consumers must make monthly payments over the course of three to five years before any debt can be discharged.

Unfortunately, Congress has made it more difficult for people to file for Chapter 7 bankruptcy protection. First, they need to qualify by passing a “means test.” This test is pretty straightforward. We compare our client’s income to the state median for a family of similar size. If your income is below the median, you qualify and can file a Chapter 7.

If your income is over, you might still qualify if your monthly expenses are high enough. However, some clients get the idea that they want to deliberately reduce their income to qualify for a Chapter 7, but there are problems with this approach that we want to warn you about.

Why You Shouldn’t Quit Your Job

The means test looks at income for the six months before you file. Some people ask if they can just quit their job to artificially suppress their income in order to get under the threshold. Technically, they could; but there are many disadvantages:

• Quitting your job harms your financial prospects going forward. The goal of a bankruptcy is to strengthen your financial position, not leave you poorer once you receive your discharge. If you quit your job, it could be hard to get a new one.
• The trustee can contest your bankruptcy if they believe you filed in “bad faith” and have abused the process. Quitting a job is one of the circumstances a judge will look at. Although it is rare for a trustee to contest bankruptcies, it could happen, in which case your Chapter 7 could be converted to a Chapter 13 or dismissed altogether.

Similar problems arise with cutting your hours to reduce your income. You are losing out on income you need, could compromise your job security, and might raise a red flag for the trustee.

Better Approaches

Consumers who are currently over the means test do have other options. For example, your income might be irregular. You could be self-employed or employed seasonally, with your income rising during certain times of the year and falling in others. If so, you could file during the time of the year when your income is at its lowest, which could put you under the line for the means test.

Another option is to look at your expenses. As mentioned above, there is an alternate way to pass the means test that calculates your disposable income after deducting living expenses. Sometimes it is possible to temporarily increase your expenses, which can decrease your disposable income a corresponding amount and let you slide in under the means test. Once you qualify for Chapter 7, you can then reduce expenses. This will harm you less than quitting a job.

Talk with an Experienced Chapter 7 Bankruptcy Lawyer in Plantation

At Nowack & Olson, our Plantation chapter 7 bankruptcy attorneys thoroughly explain the different options to our clients so they can make an informed decision about what is right for them. For help with your case, call us today at 888-813-4737 to schedule a free consultation.

Resource:

justice.gov/ust/means-testing

https://www.floridabankruptcynow.com/can-you-lose-your-ira-in-a-bankruptcy/