Jospeh Emmons: I got a new job, can I still file Bankruptcy?

Yes.

Yes you can.

Does a regular paycheck disqualify a consumer from filing for chapter 7 bankruptcy?

If you’ve read this blog with any frequency, you’ve undoubtedly seen numerous posts about bankruptcy reform and the means test. Indeed, much has been written about the means test, the vaunted gatekeeper to chapter 7 bankruptcy protection implemented by Congress as part of BAPCPA in 2005. Under the “new” law, families that earn above the median income in their state must pass the means test in order to qualify for chapter 7 bankruptcy.

It is possible to file for chapter 7 protection while earning a salary

Will a new job give you a failing grade on the means test and prevent you from filing chapter 7 bankruptcy? Likely, no. First of all earning a salary doesn’t automatically preclude anyone from qualifying for chapter 7. Only individuals and families that earn more than the average in their states must pass the means test in order to qualify and often do. A job at a professional services firm, Like J.P. Morgan, that pays a higher salary, will make the path to bankruptcy harder than a job at Walmart that doesn’t pay as much. However, keep in mind that the income guidelines for chapter 7 look backwards.

Qualifying for chapter 7 looks at past earnings

In addition, if you’ve had a prolonged period of unemployment even a new job with a high salary shouldn’t pose a means test problem. This is because the means test deducts allowed expenses from your current monthly income (average income over the last six months). If after expenses you have very little “disposable income” you will qualify for chapter 7. The six month look back period allows your period of unemployment to be averaged in with your new salary in calculating your current monthly income. For example, if you have recently landed a job that pays $100,000 annually but have only been working for 2 months, you will likely still qualify to file for chapter 7 bankruptcy because your average income over the last six months (which will include four months of no salary) will put you below your state’s average income. The means test can be complicated, if you have questions, it is wise to consult an attorney. If your attorney advises you that your income is too high for chapter 7, chapter 13 bankruptcy may be a good option.

Don’t Sell Property to Avoid Bankruptcy

Don’t cash in your 401(k) or sell your property to avoid bankruptcy. In the last several months, I have had a large number of people in their 50s and 60s contact me about filing for bankruptcy. In a lot of ways, this recession has hit people in this age group the hardest. Between the layoffs and the tough job market, a lot of people are really struggling. And even when someone is lucky enough to find a job, oftentimes it is at a significantly reduced salary.

The bad economy has caused people to file bankruptcy who didn’t expect to

The fact is that the recession is causing a lot of people to file for bankruptcy who never thought they would. While the recession is is undoubtedly a sad turn of events, I am also seeing an even more disturbing trend. Namely, a lot of them are selling all of their property in an effort to stay current with their bills and avoid filing for bankruptcy. By the time they come to me, they have already gone through everything they own. While these efforts are always well-intentioned, they are catastrophic for their finances. In a lot of cases, people are selling assets that they would otherwise be able to keep if they would have thought about filing for bankruptcy a little sooner.

Chapter 7 divides assets into two piles

When you file for chapter 7 bankruptcy, your assets are divided into two categories: exempt and nonexempt. When you file for chapter 7 bankruptcy, you get to keep your exempt assets and the bankruptcy trustee has the option of taking and selling your nonexempt assets. This distinction is vitally important because in most cases, your retirement accounts and equity in your home are exempt. The amount of the exemption varies from state to state, but the point is this: do not sell exempt property to pay debt that can be discharged in bankruptcy.

Example – mistakenly cashing in a retirement account

For example, let’s say you are in your mid-50s and are having financial difficulty. If you sell your retirement account to keep your head above water and pay credit card bills, you are literally selling your retirement years. Do not liquidate your retirement account to pay off credit card debt, or other debt that can be discharged in bankruptcy. This is especially true when you do not have a lot of time to start saving for your retirement again.

The bottom line about Bankruptcy

Do not go into denial about your financial situation. If you are thinking about selling your retirement account for living expenses, that is a pretty good sign that you should be thinking about filing for bankruptcy. But the only way you can know for sure is if you talk to a skilled bankruptcy attorney about your situation. A bankruptcy attorney will be able to listen to your situation and help you decide if filing for bankruptcy is right for you. Exemptions vary from state to state, and not all debt can be discharged in a chapter 7 bankruptcy. Therefore, be sure to talk with an attorney so you can make an informed decision. But please, do not sell any exempt assets to keep up with your daily living expenses until you have had a chance to talk with a skilled attorney.

Free Consultation with a Utah Bankruptcy Lawyer

If you have a bankruptcy question, or need to file a bankruptcy case, call Ascent Law now at (801) 676-5506. Attorneys in our office have filed over a thousand cases. We can help you now. Come in or call in for your free initial consultation.