December means bonuses for many employees. The extra cash helps them get through the holiday season, but, in terms of bankruptcy, December bonuses could mean paying thousands of dollars more to creditors over a longer extended bankruptcy period. The timing of a bankruptcy plays a crucial role in the peculiar way bankruptcy law calculates “income” for the purposes of the “means test” and the “commitment period.”
Means Test and the Commitment Period
The means test determines whether a debtor has the “means” to pay back a meaningful portion of debt to creditors. The results decide whether a person can file a Chapter 7 bankruptcy lasting four months or a Chapter 13 bankruptcy lasting three to five years.
The commitment period is the time in which the court decides a debtor must pay back creditors in Chapter 13 cases. In general, whether a debtor can propose a three-year plan or a full five-year plan depends on whether that person’s average income for the six-month period preceding the bankruptcy filing is above or below the state’s median income for a similar household. The longer period means the longer debtors have to pay back creditors and wait to rebuild their lives.
All money received during the six months prior to filing is considered when the court is calculating income, and that includes bonuses. To complicate the matter, the courts look back at income gained during the last six FULL calendar months. That means Chapter 7 cases filed in December would include money received from June 1 through November 30, but not in December.
So, if a debtor receives a bonus from work, or even a gift of cash from a family member to pay for holiday gifts, the timing of the receipt of funds matters. It could alter the results of the means test. A debtor may be able to write off most of their debt in six months or painstakingly pay back creditors for years.
The Emotional Toll of Bankruptcy
The timing strategy used in bankruptcy is very important, but equally important is a debtor’s well-being. The mental burden can be overwhelming with wide-reaching effects. It is important to speak with an attorney to seek the viable option of bankruptcy. Our role in bankruptcy is not strictly to provide legal services. We provide hope to a long-term plan of restored financial stability. Contact our office for more information.