I just lost my job. I am making purchases and taking cash advances on my credit card to get by, but I am going to max out pretty soon. Should I file for Chapter 7 bankruptcy now or wait?
Waiting to file might be necessary to pass the means test—the test you must pass to qualify for Chapter 7 bankruptcy.
Before you qualify for a debt discharge in a Chapter 7 bankruptcy, you must pass the means test. The means test looks at your income for six months before your filing date. It allows you to deduct certain expenses and then determines if you can pay back a certain percentage of your debts. If you don't pass the means test, you'll have to file for Chapter 13 for bankruptcy relief.
The lower your income, the easier it will be to pass the means test. You'll start by comparing your income to your state's median income. If your income is higher than the median income in your state and you don't have a lot of expenses, you won't pass. However, by waiting a few months, your average income will decrease over the six months before your filing date. A few or more months of zero income or unemployment income will bring down your six-month average, making it easier to pass the means test.
If you're using credit card purchases to get by, you might have a problem. It's fine to use credit for the necessities of life, such as food, utilities, and rent. However, luxury purchases of $800 and over made from the same creditor within 90 days before bankruptcy are presumed fraudulent.
Similarly, cash advances from a single creditor exceeding $1,100 taken within 70 days of filing are presumed fraudulent. In either case, the creditor could file an "adversary proceeding" or lawsuit asking the court to exclude the debt from your discharge. (The presumptive fraud figures are valid from April 1, 2022, through March 31, 2025.)
Also, keep in mind that making purchases on credit with no intention of repaying the debt is also considered fraud. For instance, if you knowingly max out your credit cards with the plan of waiting 90 days to file for bankruptcy, you end up facing a fraud suit. If you're not sure whether you should file for bankruptcy, meeting with a local bankruptcy attorney is a good idea.
Updated April 23, 2022