I taught a bankruptcy class recently as part of the Katy ISD Adult Continuing Education program. When I discussed the means test, a lady showed me a book that she purchased from Nolo, and she explained to the class how easy it was to use the means test calculators. I cautioned her and the class the same way I caution folks looking at my website: using a means test calculator and entering the data is just the beginning. The data must be analyzed by an expert. Timing of the case filing could be critical. Making a bad analysis could have dire consequences. Making this analysis as a lay person could get you very hopeful regarding bankruptcy, or miserable thinking BK may not be an option. Without having an expert look at the data, that lay person is missing a huge step. Best of all, most of us, most of the time will do that analysis for free!
We recently met with someone who makes a very good living–about $75,000 a year and is a household of 1. The person has about $60,000 in unsecured debt and a house that is upside down a bit, owes about $130k there. She’s been crushed by a divorce decree that has her paying a huge chunk of her take-home income in child support as well as on-going medical care for the child. Prior to seeing us, she regularly worked 80-90 hour weeks by taking on extra jobs to go along with her full time “real” job, just to try to make ends meet.
She recalled speaking to a bankruptcy attorney (not us!) in December on the phone for about 20 minutes. She was told that if she was going to file bankruptcy, she should just stop paying everything. I can blog endlessly regarding giving this type of legal advice after not knowing everything about someone’s circumstances but that’s not the point of this post. Had she simply taken that lawyer’s advice and waited too long, she could have been someone unnecessarily penalized by the means test. She may have to give up her house, which is $1500 a month, and it’s unlikely that she’ll be able to find anything to rent for under $1,100. Once she loses title to that house, she only gets the means test deduction of under $800 for housing expenses. So long as she’s in that house, she gets to deduct the entire payment of $1500.
Without that deduction, the math of her means test would show that she could afford to pay creditors an amount of money she absolutely could not. At best, she would have to convince the United States Trustee, or her judge, that her chapter 7 filing was not abusive. At worst, she would be stuck in a chapter 13 trying to scrape up money she could not afford, or having her case dismissed altogether.
The timing of her filing is critical. She must have title to her house to allow her case to go smoothly. If she surrenders her home post-filing, it’s not a big deal as it relates to her bankruptcy discharge. Nonetheless, an attorney simply told her to stop paying everything, with no discussion of the ramifications of losing her house prior to filing a bankruptcy.