Choosing the “correct” date upon which to file a chapter 7 or chapter 13 bankruptcy case can be important to either pass the means test, or to avoid having to take the means test altogether. Since the passage by Congress of the 2005 Bankruptcy Reform Act, debtors have been aware that the proper timing of the filing of a bankruptcy can result in excluding income from the six month income “window” encompassed by the means test. This common practice was recently challenged by the U.S. Trustee in a Washington bankruptcy case, In re Hageney, 2009 WL 5217674 (Bky.E.D.Wash. Dec. 31, 2009).
In Hageney, the debtor had been self employed as an insurance agent and broker until late summer of 2008. In August of 2008, he became in independent contractor with American General Insurance, receiving $8,000 per month. The debtor’s income previously been substantially less than that amount. He filed chapter 7 on October 30, 2008, thereby excluding his October income from the means test’s six month income calculation.
The U.S. Trustee objected to this tactic, claiming that timing the bankruptcy filing in this manner was evidence of filing the chapter 7 case in bad faith. The U.S. Trustee argued that the debtor should have waited until November 1st to file the case, which would have resulted in October’s income being included in the means test, and the presumption of abuse under section 707(b)(2) would have arisen.
The court rejected the argument that this was an unacceptable manipulation of the means test. Instead, it held that the bankruptcy law “allows a debtor to choose the date of the commencement of the case.” Litigants are free to “maximize their rights to the extent allowed in the law.” Filing the case when he did was “not an indicia of bad faith, but an acceptable excercise of rights granted by the Code.”
Although the court went on to dismiss this chapter 7 case for the bad faith act of purchasing a $20,000 motorcycle ten weeks before filing the bankruptcy, the court’s approval of the timing of the filing of the case remains an important precedent regarding means test planning.
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