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Navigating Bankruptcy Choices: Deciphering Chapter 7 vs. Chapter 13

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Introduction

For the person who is facing financial turmoil, the decision to file for bankruptcy is one fraught with complexity and nuance. Amidst the myriad considerations, understanding the distinctions between Chapter 7 and Chapter 13 bankruptcy is paramount. In this comprehensive guide, we’ll unravel the intricacies of these two bankruptcy chapters, equipping you with the knowledge to make a well-informed decision tailored to your unique circumstances.

Chapter 7 Bankruptcy: The Liquidation Option

Chapter 7 bankruptcy, often referred to as “liquidation bankruptcy,” entails the liquidation of non-exempt assets to settle debts. This option is ideal for individuals seeking a fresh start without the burden of a repayment plan. People who are facing overwhelming debt may find Chapter 7 appealing for its expediency and potential for a swift resolution.

Determining Eligibility for Chapter 7

Individuals considering Chapter 7 must meet certain eligibility criteria, including passing the means test. This test evaluates your income relative to the median income in your state and determines your ability to repay debts. Understanding your eligibility is crucial in determining whether Chapter 7 is a viable option for your financial situation.

Pros and Cons of Chapter 7

  • Pros: Quick resolution, discharge of most unsecured debts, immediate relief from creditor harassment.
  • Cons: Potential loss of non-exempt assets, limited options for debt repayment, impact on credit score.

Chapter 13 Bankruptcy: The Repayment Solution

Chapter 13 bankruptcy, often termed “reorganization bankruptcy,” involves creating a structured repayment plan to settle debts over a period of three to five years. This option is suitable for people with a steady income who wish to retain their assets and repay debts over time in a manageable way.

Crafting a Repayment Plan:

In Chapter 13 bankruptcy, an experienced bankruptcy attorney will evaluate any non-exempt assets and their client’s income to help develop a feasible repayment plan. Some negotiation with the bankruptcy trustee may be involved. This plan outlines how debts will be repaid, typically prioritizing tax debts and secured debts while accommodating essential living expenses.

Pros and Cons of Chapter 13:

  • Pros: Protection of assets, opportunity to catch up on mortgage or car payments, potential to discharge certain debts upon completion of the repayment plan.
  • Cons: Lengthy process, strict adherence to repayment plan, potential for higher overall payments compared to Chapter 7.

Determining the Best Option

Sophisticated individuals evaluating bankruptcy options must conduct a thorough assessment of their financial situation, considering factors such as income, assets, debts, and long-term financial goals. Consulting with a knowledgeable bankruptcy attorney is invaluable in navigating the complexities of Chapter 7 and Chapter 13, as well as exploring alternative solutions.

Making an Informed Decision

Ultimately, the decision to file for Chapter 7 or Chapter 13 bankruptcy hinges on a careful evaluation of the benefits, drawbacks, and suitability of each option to your unique circumstances. Bankruptcy can be used as a strategic tool to regain financial stability and pave the way for a brighter financial future.

Conclusion

Navigating the choice between Chapter 7 and Chapter 13 bankruptcy demands a nuanced understanding of each option’s implications. For the sophisticated individual, making an informed decision entails assessing eligibility, weighing the pros and cons, and aligning the chosen path with long-term financial objectives. With the guidance of a seasoned bankruptcy attorney, you can embark on the path towards financial recovery with clarity, confidence, and sophistication.

Schedule a free bankruptcy consultation with Jennifer Weil, a New Jersey bankruptcy attorney, to discuss your options.

Decoding the Chapter 7 Means Test

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Introduction:

When considering Chapter 7 bankruptcy, understanding the means test is essential. The means test helps determine eligibility by comparing your income to the median income in your state. This article provides a comprehensive guide to help you understand how the Chapter 7 means test works and its significance in the bankruptcy process.

  1. Purpose of the Means Test: The means test was introduced as part of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) to prevent abuse of Chapter 7 bankruptcy by individuals with higher incomes. Its primary purpose is to ensure that those who have the means to repay some of their debts are directed towards Chapter 13 bankruptcy instead.
  2. Calculating Median Income: To begin the means test, you must determine your household’s current monthly income. This includes income from all sources, such as employment, self-employment, rental properties, and retirement benefits. Next, compare your income to the median income for a household of the same size in your state. The median income figures are regularly updated and can be obtained from the U.S. Trustee Program’s website or your local bankruptcy court.
  3. If Your Income Is Below the Median: If your income falls below the median income for your state, you automatically pass the means test and are eligible to file for Chapter 7 bankruptcy without further scrutiny. However, it’s important to note that passing the means test doesn’t guarantee approval, as other factors will be considered during the bankruptcy process.
  4. If Your Income Is Above the Median: If your income exceeds the median income, you’ll need to proceed with the second part of the means test, which analyzes your disposable income. This calculation deducts specific allowable expenses from your current monthly income to determine the amount available for debt repayment.
  5. Deducting Allowable Expenses: The means test allows deductions for certain standardized expenses based on predetermined guidelines. The remaining income after deducting allowable expenses represents your disposable income.
  6. Disposable Income and Chapter 7 Eligibility: The amount of disposable income you have plays a significant role in determining your eligibility for Chapter 7 bankruptcy. If your disposable income falls below a certain threshold, you are likely to qualify for Chapter 7. However, if your disposable income exceeds the threshold, you may be required to file for Chapter 13 bankruptcy, which involves a repayment plan based on your income and debts.
  7. Seeking Professional Guidance: Navigating the means test and its complexities can be challenging. It is highly recommended to consult with a qualified bankruptcy attorney who can provide personalized advice based on your unique financial situation. They will help ensure accurate completion of the means test and guide you through the bankruptcy process.

Conclusion:

The Chapter 7 means test is a crucial component of determining eligibility for bankruptcy relief. Understanding how it works and its implications is vital when considering filing for Chapter 7 bankruptcy. By calculating your income, comparing it to the median income, deducting allowable expenses, and determining your disposable income, you can gain clarity on your eligibility. Remember, consulting with a knowledgeable bankruptcy attorney is crucial for accurate completion of the means test and obtaining the best possible outcome in your bankruptcy case.

Schedule a free telephone appointment to discuss your unique debt situation with attorney Jennifer Weil at my Setmore page.

Your Bankruptcy Consultation: The 3 Main Topics

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What happens at a bankruptcy consultation? The answer to this question is different depending on who the bankruptcy consultation is with, whether the consultation is in person or by phone, and what systems the bankruptcy attorney has set up for the consultation. I can give you some general insight as well as information about how I conduct my own bankruptcy consultations.

Consultation Fees

Many, but not all, bankruptcy attorneys do some sort of free consultation. The attorneys who don’t do free consultations aren’t necessarily more expensive; often, those attorneys feel that they are giving more value during the consultation phase, so they should charge a fee. Or they feel that they shouldn’t give away their time. There may be an incentive built into the consultation fee in the sense that the attorney may credit such a fee against the entire bankruptcy attorney fee if you hire them.

As of yet, I don’t charge bankruptcy consultation fees for the most part for a couple of reasons: First, I do all my bankruptcy consultations over a relatively short phone call and not in person. In-person consultations take up far more of my time and I always charge for those. This doesn’t mean that I do all my phone consultations for free. I may charge a small fee for other types of consultations, such as student-loan consultations, since I’m providing a lot of value during those sessions.

Second, I see the primary purpose of the bankruptcy phone consultation as determining whether your case is one that I am able to take. I ask enough questions to enable me to determine whether the case is one that I have the time for and whether it is of the type that I want to take. For example, if your primary reason for calling is to get help with keeping your home through a mortgage foreclosure, I’m probably not the lawyer for you, since I generally don’t like to take those cases. But I may have a good lawyer referral or two for you!

Discussing Your Situation

The facts of your particular financial situation will come up during the bankruptcy consultation. A variety of issues are relevant to your financial situation and to a potential bankruptcy case, the most basic of which are how much money you make and what kind of debts you would like to have discharged in bankruptcy.

Not by any stretch of the imagination are these the only two issues that will come into play in your bankruptcy case, but they are a good place to start. You should be psychologically prepared to answer all sorts of questions about your financial affairs that would be inappropriate in a social setting. Think about what you own that might have any resale value, how you incurred your debts, whether you are or have been involved in a business of any kind and with whom, whether your spouse has anything to say about you filing for bankruptcy, etc.

All the different factors that could possibly come into play regarding your financial situation are too numerous and varied to list here. Just remember that anything and everything impacting your overall financial situation is potentially relevant and don’t forget to bring it up with the bankruptcy attorney at some point.

Eligibility For Bankruptcy

One topic that’s relevant to every bankruptcy consultation is your eligibility for bankruptcy, which also ties into the question of which chapter you might file.

Sometimes, your financial goals might dictate which chapter you should file, such as saving a home from foreclosure, for example. But there’s also the question of which chapter you are eligible to file, if any.

During the bankruptcy consultation, the attorney might unearth information showing that you aren’t eligible for the chapter you had hoped to file, or that a different chapter of bankruptcy would be better for your situation. Or they might find that bankruptcy is a bad idea for you altogether.

If your gross (before tax) income is close to the line of eligibility, the attorney may want to run the means test for you. Running the means test is not simple or quick and you should expect to pay a fee for this process. In my practice, I roll this fee into the bankruptcy, if the client hires me to file their case.

Call to schedule a free telephone bankruptcy consultation with attorney Jennifer Weil at (201) 676-0722.

When Chapter 7s Are Not So Simple

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The goal of most Chapter 7 cases is to get in and get out—file the petition, go to a hearing with your attorney a month later, and two months after the hearing, your debts get written off. Mission accomplished, end of story. And usually that’s how it goes. What are some reasons that a Chapter 7 case doesn’t go that way?

Four main kinds of problems can happen:

Income

Under the “means test,” if you made or received too much money in the 6 full calendar months before your Chapter 7 case is filed, you can be disqualified from Chapter 7. As a result, you can be forced into a 3-to-5 year Chapter 13 case, or have your case be dismissed altogether. These results can be avoided by careful timing of your case filing, or by making changes to your income beforehand, or by a proactive filing under Chapter 13.

Assets

In Chapter 7, if you have an asset that is not “exempt” (protected), the Chapter 7 trustee will be entitled to take and sell that asset, and pay the proceeds to your creditors. You might be happy to surrender a particular asset you don’t need in return for the discharge of your debts, in particular if the trustee is going use the proceeds in part to pay a debt that you want paid, such as a child support arrearage or an income tax obligation. But you may not want to surrender that asset, either because you think it is worth less than the trustee thinks or because you believe it fits within an exemption. Or you may simply want to pay off the trustee for the privilege of keeping that asset. In all these “asset” scenarios, there are complications not present in an undisputed “no asset” case.

Creditor Challenges to Discharge of a Debt

Creditors have the limited right to raise objections to the discharge of their individual debts, on grounds such as fraud, misrepresentation, theft, intentional injury to person or property, and similar bad acts. In most circumstances, the creditor must raise such objections within about three months of the filing of your Chapter 7 case. So once that deadline passes you no longer need to worry about this, as long as that creditor got appropriate notice of your case.

Trustee Challenges to Discharge of Any Debts

If you do not disclose all your assets or fail to answer other questions accurately, either in writing or orally at the hearing with the trustee, or if you fail to cooperate with the trustee’s investigation of your financial circumstances, you could lose the ability to discharge any of your debts. The bankruptcy system relies on the honesty and accuracy of debtors. So the system is quite harsh toward those who abuse the system by trying to hide things.

To repeat: most of the time, Chapter 7s are straightforward. That’s especially true if you have been completely honest and thorough with your attorney during your meetings and through the information and documents you’ve provided. In Chapter 7 cases that I do for my clients, my job is to have those cases run smoothly. I do that by carefully reviewing my clients’ circumstances to make sure that there is nothing troublesome, and if there is, to address it in advance in the best way possible. That way we will have a smooth case, or at least my clients will know in advance the risks involved. So, be honest and thorough with your attorney, to increase the odds of having a simple Chapter 7 case.

Discuss your financial situation with bankruptcy attorney Jennifer N. Weil by scheduling a phone appointment at (201) 676-0722 or by emailing weilattorney@gmail.com.

Chapter 7 Bankruptcy After Closing Your Business – Factors to Consider

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Meta Description: Filing for Chapter 7 bankruptcy after shutting down your business may seem like the best option, but there are three key factors to consider: assets, taxes, and other non-dischargeable debts. Consult with a lawyer to determine what’s best for you.

Introduction:

Closing down a business can be a difficult and emotional experience. After all the hard work and effort put into making it successful, it can be tempting to file for Chapter 7 bankruptcy for a fresh start. However, it’s important to consider the consequences before making a decision. In this blog post, we will discuss three factors to consider when deciding whether Chapter 7 bankruptcy is the right choice for you after closing your business.

  1. Business Assets:

Chapter 7 bankruptcy is divided into two categories: “no asset” and “asset.” In a “no asset” case, the Chapter 7 trustee decides that none of your assets are worth taking and selling to pay creditors. On the other hand, if your recently closed business has assets that are not exempt and are worth the trustee’s effort to collect and liquidate, it’s important to discuss with a lawyer whether Chapter 7 is in your best interest compared to what would happen to those assets in a Chapter 13 case.

  1. Taxes:

Closed-business bankruptcy cases often involve tax debts. While some taxes can be discharged in a Chapter 7 case, most cannot. Chapter 13 is often a better way to deal with taxes as it will depend on the type of tax and a series of other factors such as the time the tax became due and whether a tax return was filed.

  1. Other Non-dischargeable Debts:

Closed-business bankruptcies can result in more creditor challenges to the discharge of debts compared to other bankruptcy cases. These challenges are usually based on allegations of fraud against the business owner. Depending on the nature of the allegations, Chapter 13 may give you certain legal and tactical advantages over Chapter 7.

Conclusion:

Filing for Chapter 7 bankruptcy after closing down your business may seem like the best option, but it’s important to consider all factors before making a decision. The three factors discussed in this blog post – business assets, taxes, and other non-dischargeable debts – can play a significant role in determining what is best for you. It’s recommended to consult with a lawyer to help you make an informed decision.

If you are considering bankruptcy, it’s worth discussing your options; make a free phone appointment with Jennifer N. Weil, Esq. by clicking here.

2 Ways to Use Bankruptcy To Close Your Business

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2 ways to use bankruptcy to close your business involves leaving your business debt behind so that it does not come back to haunt you personally.

Closing down a business can be messy. Business bankruptcy is often more complicated than a regular bankruptcy case. But in one way, a business bankruptcy may be easier than a consumer bankruptcy case.

If you’ve owned a small business that you have shut down, or that you are about to shut down, you may be afraid of filing bankruptcy because you’ve heard that “business bankruptcies” are expensive and not a good way to wrap up the affairs of a business. However, bankruptcy can be a simple and effective solution.

The Means Test

The “means test” determines whether you may file a regular Chapter 7 case to discharge your debts in a few months, or whether you must file a 3-to-5-year Chapter 13 repayment case. Unless you need some of the other benefits of Chapter 13, many people prefer Chapter 7 because it gets them a fresh start more quickly and cheaply.

In some situations, a former business owner cannot pass the means test and will be required to go through Chapter 13. For example:

    • If, after closing her business, a business owner got a good job before filing bankruptcy, the income from that job may be higher than the “median income” applicable to her state and family size. So she may not pass the “means test.”
    • If the business was operated by one spouse while the other worked an outside job and earned a high income, the other spouse’s income may bump the couple above the “median income” with the result of not passing the “means test.”

But here’s the good news for some former business owners: the “means test” only applies if your “debts are primarily consumer debts.” (See Section 707(b)(1) of the Bankruptcy Code.) So if your debts are primarily business debts—more than 50%–you essentially can skip the “means test.”

Be careful here, because “debts” means all debts, including home mortgages and personal vehicle loans. So your business debts may have to be high to be more than all your consumer debts.

To apply this law, we must be clear about the difference between these two types of debts. What’s a “consumer debt”? The definition may sound familiar: it’s a “debt incurred by an individual primarily for a personal, family, or household purpose.” (Section 101(8).)  For example, if you took out a second mortgage on your home a few years ago to fund your business, the current balance on that second mortgage may not be a consumer debt.

Sometimes the line between consumer and non-consumer debt is not clear, so this is something you need to discuss thoroughly with your attorney if you want to avoid the “means test” under this “primarily business debts” exception.

If you have questions about qualifying for bankruptcy, call to schedule a free telephone appointment with Jennifer N. Weil, Esq. to discuss your situation at (201) 676-0722 or by emailing weilattorney@gmail.com.

Business debt can allow you to qualify for Ch. 7

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If you owe more business/non-consumer debt than consumer debt, then you avoid not only the “means test” but also some other roadblocks to a successful post-business Chapter 7 bankruptcy case.

What’s the “Means Test” and Why Does It Matter?

Bankruptcy law says that if your income is more than a certain amount, you have to pass a means test to be able to go through a Chapter 7 case successfully. One way to avoid this means test is by having less income than the permitted median family income for the state in which you live. But the median family income amounts are relatively low. If your income is above the applicable median amount, you have to go through the entire means test at the risk of being forced into a 3-to-5-year Chapter 13 payment plan instead of a three-month Chapter 7 liquidation.

Debtors with More Non-Consumer Debts than Consumer Debts

You can skip the means test altogether if your debts are not primarily consumer debts. This way you could be eligible for a Chapter 7 case even if your income is above the median level. Indeed, you avoid other kinds of “presumptions of abuse” as well, not just the formulaic means test, but also the broader “totality of circumstances” challenges. Congress decided that if most of your debts are from a failed business venture, you should be allowed a fresh start through Chapter 7, regardless of your current income and expenses.

What is a “Consumer Debt”?

The Bankruptcy Code defines a “consumer debt” as one “incurred by an individual primarily for a personal, family, or household purpose.”

The focus is on the reason why you incurred the debt. If you made a credit purchase or took out the loan for your business, then it may not be a “consumer debt.” That is a factual question that must be decided separately for each one of your debts.

“Primarily Consumer Debts”?

The Bankruptcy Code does not make this crystal clear, but generally, if the total amount of consumer debt is less than the total amount of non-consumer debts, your debts are not primarily consumer debts. And then you do not have to mess with the means test.

Seemingly Consumer Debts May Not Be

Small business owners often finance the start-up and operation of their businesses with what would otherwise appear to be consumer credit—credit cards, home equity lines of credit and such. These may qualify as non-consumer debts in calculating whether you have primarily consumer debts. Your use of various forms of personal credit to fund your business is something to discuss with your attorney.

Unexpectedly High Business Debts Can Help

Sometimes business owners end up with business debts larger than they thought they would have when their business closed. For example, if you had to break a commercial lease when you closed your business, the unpaid lease payments you owe could be huge. Or your business closure may have left you with other unexpected debts, such as obligations to business partners or litigation resulting in damages owed. The good side of larger-than-expected business debts is that they may allow you to skip the means test and other grounds for dismissal or conversion to Chapter 13, allowing you to discharge your debts through Chapter 7.

For bankruptcy in Northern New Jersey, call: (201) 676-0722.

Slight median income changes coming Nov. 1

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In New Jersey, it will be a little easier or a little harder to qualify for a Chapter 7 as of November 1, 2011. Whether it’ll be easier or harder for you depends on your family size.

The bankruptcy system looks to the U.S. Census to calculate each state’s median income, as applied to family size. If your income is below your state’s median income for your family size, then in most situations you would be eligible for a Chapter 7. But if your income is above the median and you still want to file a Chapter 7 case, then you have to fill out a long and rather complicated form detailing your allowed expenses to determine whether or not your filing of a Chapter 7 would be “abusive.” So if you want to file a Chapter 7 bankruptcy, it’s a lot easier if you’re below the median.

On November 1, new median income amounts become applicable. In New Jersey, for a household of 1, the median income level will rise slightly from $59,060 to $60,322.  For a household of 2, it will drop from $70, 680 to $67, 503.  The new figures for all states can be seen here. Remember, if the median income goes up, that makes it a little more likely that your income will fall below that median, and you’ll have smoother sailing qualifying for Chapter 7.  New Jersey has some of the highest median income levels in the U.S.

So, if your income is close to the applicable median amount, and the median is increasing for your family size in your state on November 1, then you have a better chance at falling under the median if you file on or after that date.

Please understand that the meaning of “income” in the bankruptcy context is different from conventional meanings of that word. Bankruptcy “income” is calculated using a six-calendar-month look-back period that is doubled and then divided by 12 for an average monthly income. It includes all sources of income from all family members other than social security and does not only include taxable income.

Because of this and many other complicated issues, you should consult with a bankruptcy attorney about median income questions.

Photo by Rafa.Garcés.

Must I report illegal or previously unreported income in my bankruptcy?

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It sometimes comes up that a person who wants to file for bankruptcy has income that is either derived from an illegal source (such as drug dealing) or that has not been reported to the IRS (when it should have been). Also, many people get confused between the reporting requirements for the IRS and those for the bankruptcy court – understandably, they tend to think that these requirements are the same when they are not.

The fact is, you need to tell your attorney about all of your income, regardless of whether it is derived from an illegal source or whether you think it is not taxable or should not count. Not all income is necessarily countable as such for certain purposes in bankruptcy – such as Social Security on the means test portion of the bankruptcy papers – but it all needs to be disclosed to your attorney so that their analysis can be completed accurately.

Illegal sources

A recent case from Pennsylvania highlights a problem with illegal income and failing to report it in bankruptcy. The debtor filed a Chapter 7 and received a discharge of her debts. Later, she was convicted of heroin and cocaine trafficking. As a result, the trustee for her bankruptcy case asked the court to revoke her discharge based on fraud, claiming that the debtor failed to report her revenue from her drug trafficking activities.

The court decided that while the debtor had a duty to report all income, even if it was from illegal activity, the trustee did not meet her burden of proof to show that there was a knowing and fraudulent intent behind the failure to report the illegal income. The trustee lacked basic evidence as to the amount of income and when it was received.

While the debtor in the Pennsylvania case prevailed in the trustee’s action against her, the case serves as a reminder of the pitfalls that await the debtor with illegal income. The debtor who has current income derived from illegal activity may wish to think twice about filing bankruptcy at all.

Unreported taxable income

And the potential debtor who has had income that was not reported to the IRS or to state taxing authorities when it should have been may wish to delay filing for bankruptcy until the tax issues have been defined more clearly. Specifically, any tax returns that should have been filed but were not need to be filed so that any tax debt or refund amounts can be set prior to filing. It is difficult to list a tax debt (or a refund owed to you) on your bankruptcy paperwork if you do not know exactly how much it is.

Additionally, you are required to provide your bankruptcy trustee with copies of your tax returns. Your case can be dismissed for failure to provide these copies.

Photo by Dave Dugdale.

Variable income and the Chapter 7 means test

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In qualifying for a Chapter 7 bankruptcy, means testing is not an issue for people whose pay is below the median for their state and family size, but for those whose income is more, it can be a problem.

The means test is like a big IRS form with spaces for plugging in certain numbers and checking off boxes. If you’ve filed for bankruptcy in years past, you may not have seen it. The form was introduced as a result of the new bankruptcy legislation that Congress passed in 2005, which created more hoops for individual bankruptcy filers to jump through.

It has two main parts: The first determines whether your earnings are above or below median. The second is for those who are above median – it lets you take *certain* deductions from your income in an attempt to lower it to the point where you can qualify for a Chapter 7.

Obviously, it’s preferable not to have to fill out the second part of the Chapter 7 means test.

Those whose earnings vary during the year might be in a better position with regard to the means test than those with steady over-median earnings. Examples of people with variable pay over the course of a typical year include teachers, college professors, those who work solely or primarily on commission, and those who periodically claim unemployment insurance benefits because of temporary jobs or seasonal employment.

Many people credit their variable income for getting them into debt trouble to begin with, since they aren’t always able to afford their monthly payments steadily throughout the year.

How can earnings that vary over the year possibly be to your benefit? Because the means test only includes the earnings you received during the 6 months before your bankruptcy filing. If that prior 6 months encompasses a part of the year during which your income was lower, you have a better chance at your pay being below the median and qualifying for a Chapter 7.

So when considering the question of when you should file, think about filing soon after a period of lower income.

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