Charlotte Bankruptcy Lawyer Bryan W. Stone of Arnold & Smith, PLLC answers the question “What is the means test?”
The effect of getting a raise or losing your job after filing for bankruptcy depends on which type of personal bankruptcy you filed, and understanding what action to take is important. The temptation to not get around to reporting modest income increases, for example, can lead to your bankruptcy case getting thrown out of court, full responsibility for all debts and criminal fraud charges.
Chapter 7 bankruptcies are based upon the premise that the filer’s debt-income ratio is spiraled out of control. They provide relief from debt by liquidating certain portions of a person’s assets to pay off their debts, while cancelling, or discharging, other debts altogether. To qualify for Chapter 7 you must pass a “means test” that confirms you are not eligible for a Chapter 13 bankruptcy that offers a repayment plan method of cancelling your debts. Individuals who file for Chapter 7 bankruptcy are required to report to their trustee any change in income both before and six months after they receive any discharge/cancellation of a debt. A sudden increase in income before Chapter 7 is filed can mean you qualify for a Chapter 13 bankruptcy instead. A decrease before filing can solidify your standing to file a Chapter 7.
A Chapter 13 bankruptcy filing will typically last much longer than a Chapter 7, which is usually filed for, processed and discharged in a matter of months. By contrast, a Chapter 13’s payment plan lasts between three to five years. This lets the filer receive the most affordable payments for his or her plan and catch up on past due debt balances. However, your monthly repayment amounts are subject to change during this time.
When you initially file for a Chapter 13 bankruptcy, your attorney should submit a proposed repayment plan to the trustee assigned to your case. The trustee reviews (among other things) your income, expenses and debts and either approves or modifies the proposed payment plan depending on whether they think it adequately pays back your debts.
Once your trustee approves the plan he or she will send you a plan confirmation that details your reporting requirements to them and your monthly payment obligation. You then send these monthly payments to the trustee, who disperses them amongst your creditors.
Your trustee will conduct an annual review of your income, and it is important to report any changes, especially increases, to income before that review. If the trustee thinks you were deliberately withholding an income increase to avoid paying more to creditors, you can be charged with fraud (which carries up to five years in federal prison and $250,000 in fines) and have your bankruptcy case thrown out of court.
Depending on your situation, a change in income during bankruptcy may or may not affect your repayment plan installments.
Ch. 13: Raises in Income
The monthly contribution in a Chapter 13 repayment plan is supposed to be based on earning capacity, so if you receive a bonus or raise, it follows that your earning capacity is increased. If you receive a raise that is accompanied by an increase in expenses, such as if it pushes you into a higher tax bracket, your installment might not increase. However, if you got a new job or a substantial pay increase without a corresponding spike in expenses, your trustee can file a request or motion with the bankruptcy court that your monthly payment be adjusted accordingly.
Your bankruptcy attorney may be able to negotiate the amount and duration of the plan with the trustee—for example, so that your monthly payment would increase, but the overall length of your repayment period would shorten. Income increases after you have paid 36 payments, or three years’ worth, are less likely to cause an increase in payment plan installments.
Ch. 13: Decreases in Income
If you lose your job, are cut from full time to part time, get demoted, or have some other change in your employment status that decreases your income, you can ask your bankruptcy attorney to file a motion to request a review of your situation and decrease in your monthly payment.
There are many other factors that can change your repayment plan under a Chapter 13 bankruptcy, such as missing a payment or creditors lowballing how much you owe them in your filing papers. It is important to have an experienced bankruptcy attorney fighting to protect your interests and negotiate as favorable a repayment plan as possible in a Chapter 13 bankruptcy.
If you are contemplating bankruptcy in the Charlotte area, please call the skilled lawyers at Arnold & Smith, PLLC find additional resources here. As professionals who are experienced at handling all kinds of bankruptcy matters, our attorneys will provide you with legally sound advice for your particular situation.
About the Author
Kyle Frost joined Arnold & Smith, PLLC in 2013 where he focuses his practice on all aspects of civil litigation and bankruptcy, including: Chapter 7, Chapter 11, Chapter 13, home loan modifications and landlord-tenant issues.
Born and raised in upstate New York, Mr. Frost attended the University at Albany on a Presidential Scholarship, graduating magna cum laude with a double major in Political Science and Sociology. He went on to attended Wake Forest University School of Law in Winston Salem, North Carolina.
Following college, Mr. Frost spent over a year teaching English in South Korea. He worked in a private school in Seoul developing curriculum, English programs, and educating both children and adults that were interested in learning a new language.
In his spare time, Mr. Frost enjoys homebrewing, fishing, and travelling.
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