When Should You File For Bankruptcy If Your Income Varies Month To Month?
Many Americans’ incomes are fairly consistent. Sure, we get a raise here and there, maybe a bonus, but for the most part, our incomes stay consistent from month to month. But for other people, income can vary. Perhaps they work on commission, or do side jobs that may vary in how often they occur, or how much they pay. People who own businesses can make a ton of money this month and then no money the next 3 months.
If you are one of the people whose incomes tend to vary, you need to make sure to time your bankruptcy the right way, as your income at the time you file will dictate a lot about how your case goes.
Average Income Matters
As a general rule, your income when you file for bankruptcy is the average income you earned through the past 6 months. Even though you maybe got a bonus, inheritance, or government stimulus check that artificially increased that average, bankruptcy law doesn’t much care—your income is a straight average from the last six months.
If you do get sporadic income, deciding whether to file at a time when your average is higher or lower can be an important decision.
When Lower is Better
Having a lower average monthly income is better if you are trying to file for Chapter 7 bankruptcy. The lower your income is, the more likely it is that you will pass the means test, which requires that you earn less than a certain amount of money in order to file.
Making less money also makes it less likely that a trustee will look deeper into your case, or that the trustee will suspect any fraud.
When you earn less, presumably, you have less money in your bank account. That’s good, because that money has to be exempted or protected. The less money in your account, the less of your exemption that has to be used to protect those funds.
When More Money is Better
More money may be better, if you want to or have to file for Chapter 13 bankruptcy. Chapter 13 bankruptcy requires that you be able to make payments under a Chapter 13 plan. Many debtors with lower incomes find that they do not qualify for a Chapter 13 because they can’t afford the payments.
Having more money also can help you if you are looking to reaffirm a debt—that is, keep a debt valid, even after bankruptcy. This often happens when people want to keep their cars or houses—they need to reaffirm their car or home loan, to keep these assets, and a court will only approve of that if you make enough income.
However, as noted above, making more money means possibly having more money in your bank account—money that can be taken if it can’t be exempted.