As a bankruptcy lawyer one of the biggest concerns I hear from my clients is the possibility that they will not qualify for a Chapter 7 bankruptcy and will have to file under Chapter 13 instead.
Since 2005 the bankruptcy law has contained a mathematical formula, calls the means test, which generally determines, if debtors will have enough income to pay back part of their debts and will thus have to file a Chapter 13 and make monthly payments.
The means tests takes a household’s average income for six months and subtracts out what the law considers reasonable expenses to determine whether the debtors can still afford to pay some debt.
Unfortunately, many individuals in financial difficulty end up liquidating their retirement accounts, such as 401Ks or IRAs in an attempt to avoid bankruptcy, and if they end up having to file anyway, the question is whether the withdrawals they made within six months prior to filing will be treated as income in the means test and thus force them to file under Chapter 13.
Fortunately, when the issue has been raised the courts have tended to take the position that the Debtor’s action was more like the withdrawal from a savings account, and that it should not be counted as income for this purpose.
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