Pre-Bankruptcy Means Test Planning — Try Moving

27 Jan Pre-Bankruptcy Means Test Planning — Try Moving

The 2005 amendments to the Bankruptcy Code created a very complex rule to discourage folks from moving around the country to protect more property. But the same amendments encourage people to do so if it helps avoid that same law.

One aspect of the law we have come to hate is the change to discourage folks from moving their assets from a state where the assets are not protected to one where they are, and then filing bankruptcy. There is no doubt, at least in my mind, that there were abuses of this option. But the new rules are too complex and arbitrary, as South Carolina bankruptcy lawyer, Dana Wilkinson, has pointed out.

If you explore this blog, we also discuss the means test often. It is supposed to encourage higher-income debtors to file Chapter 13 instead of Chapter 7. In general, the idea is that families with income over the state’s median will be forced out of liquidation and into reorganization.

So here’s a question I’ve asked some of my clients who might be hurt by this? Ever thought of moving out of state? In my part of the country, metropolitan St. Louis, many people live or work within a short distance from the Illinois border. And if they are single, with no dependents to hold them back, the difference can be dramatic. In Missouri, your income must be under $38,100 right now to have the law presume you are not abusing the process by filing Chapter 7. A few minutes drive to the beautiful state of Illinois, and the income threshold jumps to over $45,000.

Now, I don’t practice in Illinois, so I’m likely to have just sent a client to an Illinois bankruptcy attorney. But the irony is that the client probably doesn’t need to change jobs, their cost-of-living is likely to have gone down slightly moving from urban St. Louis to more rural Southern Illinois. And, if they establish residency, they might avoid being trapped in a five-year Chapter 13 repayment program and qualify for a simple Chapter 7 case. Some Missouri law will likely apply for awhile to part of the case. But that’s a small issue in many cases.

Obviously relocating just to pass the means test could be more trouble than it’s worth for some people. It would mostly apply to people with fewer roots in a community or who have comparable roots elsewhere.

It’s also important to be aware of this effect if you are relocating anyway. For example, if you live in a higher-income region, a relocation to a lower-income state might narrow your bankruptcy options. It might well pay to consider bankruptcy before moving — or at least consulting with a bankruptcy lawyer about the ramifications of the move.

As usual with the law, the unintended consequences are often the most intriguing.

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I have been a bankruptcy attorney since 1989. Our firm represents consumers filing bankruptcy almost exclusively, although I have represented bankruptcy trustees as well as creditors. For 2017-2018 I am also serving on the American Bankruptcy Institute's Commission on Consumer Bankruptcy. If you live in Eastern Missouri, visit our website, send an e-mail or give us a call (314) 781-3400. Our website:
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