New Job--Time to File Bankruptcy?

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For many, bankruptcy first comes to mind as solution utilized by a person recently unemployed. Indeed, many people do file bankruptcy after experiencing a job loss, and there are certainly many cases where bankruptcy debt relief can be very helpful when household income has declined. So why would someone file bankruptcy after income has increased?

The short answer is that one's finances are starting to turn around, and one wants to move one from the debts that piled up while income was lower. In many ways, this represents a classic desire to start fresh with bankruptcy. Two particular situations illustrate the application of bankruptcy for people with new income.

Chapter 13 to Cure Defaults

One the powers of a chapter 13 bankruptcy is propose to cure defaults on long term debts. For someone who has fallen several months behind on a mortgage, it may be impossible to come up with a payment adequate to reinstate the mortgage as demanded by a bank, even with a new salary in the household. Chapter 13 bankruptcy doesn't require negotiation with the bank; instead, the chapter 13 plan proposes to pay back the missed mortgage payments over 3 to 5 years. Elsewhere, I discuss in more detail how a chapter 13 can cure a mortgage default and prevent foreclosure.

Chapter 13 can also pay off a car on which the payments aren't current or catch up on certain back taxes. In high-income situations, it can also be an affordable way to pay off credit cards (although many chapter 13 debtors won't be required to make such payments). At the end of the chapter 13 plan, the debtor is current on the mortgage, has the cars paid off, and unsecured debts (such as credit cards and medical bills) discharged.

Chapter 7 for Unsecured Debts

When there aren't past due secured debts that need resolution, chapter 7 bankruptcy becomes an option for the newly employed seeking a clean break from past debts. One might view chapter 7 as a tool to relatively quickly put some of the financial consequences of unemployment behind oneself.

The issue that has to be considered in this scenario is whether the amount of new income will create eligibility problems for chapter 7. The statutory means test employs a six-month average of income. Accordingly, as time passes from date a new job started, the means test income (the inaptly named "current monthly income") will slowly increase. Filing earlier would then grant the newly employed debtor a mathematical head start on the means test.

The means test is not the only way one can run into income-related eligibility issues in chapter 7. There is also a totality-of-circumstances test that could result in the dismissal of a chapter 7 regardless of the means test result. This test is somewhat less automatic than the means test, and issues under it are not going to be asserted by the Bankruptcy Administrator in every case where income has increased after the means test look-back period. Other events from the debtor's pre-bankruptcy financial life, including the cause of the bankruptcy itself, play into the totality-of-circumstances test, and how those events would be weighed by a judge has to be carefully considered when investigating chapter 7 bankruptcy following new employment.


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Knightdale Attorney Erich Fabricius represents clients in bankruptcy, consumer debt litigation, and in small business matters. He is licensed to practice law in North Carolina. His blog posts consider matters related to debt, bankruptcy, litigation, and other legal issues in North Carolina.

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This blog post is made available for educational and informational purposes only and to promote a general understanding of the law, and not to provide specific legal advice. Use of this blog does not create an attorney-client relationship. Reading this post is not a substitute for obtaining legal advice based on the unique facts of your situation from an attorney licensed to practice law in your state. No representation is made regarding the currentness of the information contained in this post. Examples that may be provided in this post are merely for illustrative purposes; the results in your case may be different and no results are guaranteed.