Means test issues in bankruptcy extend far beyond how much income you have. The allowable expense deductions for your life after filing bankruptcy count, too.
After an hour long initial consultation with a client, these complexities became clear when the client tagged the means test with incredible clarity.
It’s like playing three dimensional chess
Pretty good assessment of the mess Congress made when it “reformed” bankruptcy law.
We were juggling the means test interaction between unfiled tax returns, a business downturn, and payments to an estranged spouse not yet ordered by a court.
- how much was owed to the IRS
- would the voluntary support of an estranged spouse qualify as a means test deduction
- what’s the impact of living with parents on the housing deduction
- how would spousal support be treated for the current year’s taxes after the recent tax changes
- is it better to wind down the existing corporation and start over
The client demonstrated further savvy by holding this exploratory meeting with a bankruptcy attorney before there was a crisis.
He had time to make the spousal support officially court ordered. The tax returns would tell us whether there were priority taxes that skew the means test.
We could analyze the choices and just what the means test would mean if he elected Chapter 13.
It felt good to applaud a client.
Timing is everything in bankruptcy
Timing for a bankruptcy filing extends beyond the means test. Bankruptcy law looks backward from the date of filing to fix the rights of the person filing and the rights of their creditors.
When you file affects
- Exemptions
- Discharging taxes
- Tax refunds
- Clawbacks of money transfers
- Eligibility to file bankruptcy
- The amount of your Chapter 13 payment
There’s an entire post here on Soapbox analyzing those bankruptcy timing issues.
For right now, let’s just speak up for planning ahead.
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Unfiled tax returns are a life sentence
