How Variable Income Can Impact An Arizona Bankruptcy Filing

The heat in Arizona draws in unique crowds from the rest of the country. One phenomenon Arizona is known for is snowbirds, or retirees who spend the summer months in a cooler state, and the winter months in the desert. This means more people in town spending their hard-earned dollars on local goods and services. Another consideration is how tourism changes in Arizona due to the weather. While many avoid trips to Phoenix and Tucson during the summer, in the winter, Arizona is home to special events that draw in crowds like Waste Management Open and the Barrett Jackson car auction. This means many workers in the hospitality and entertainment industries earn more during these months than they do during other times of the year. If someone in this type of situation ends up in debt, they may need bankruptcy to clear the slate and start anew. But their income could present issues in either a chapter 7 or chapter 13 bankruptcy filing. And this is just one type of issue that a bankruptcy debtor could potentially encounter. Want guidance for navigating obstacles presented by chapter 7 and chapter 13 bankruptcy? Schedule your free consultation with our Chandler bankruptcy firm today by calling 480-833-8000.

Qualifying For Chapter 7 Bankruptcy With Median Household Income

If a debtor plans to file for chapter 7 bankruptcy, they can avoid ever having to do the means test if they can show income eligibility through a household income comparison with the state median. This calculation only shows income eligibility for chapter 7 bankruptcy, although it can determine the length of a chapter 13 bankruptcy payment plan. Here, the debtor calculates their average monthly income using their last 6 months of income. Any other household members’ income counts, too. Then they compare it to the state median household income based on number of household members. When the number is lower, they are qualified for chapter 7 bankruptcy. If it is higher, they either need to use the means test to qualify for chapter 7 bankruptcy, or check if they qualify for chapter 13 bankruptcy instead. In chapter 13 bankruptcy, debtors whose household income falls below the state median have payment plans lasting 3 years. For households with average monthly income exceeding the state median, a chapter 13 payment plan lasts 5 years.

Qualifying For Chapter 7 or Chapter 13 Bankruptcy With The Means Test

When the median household income comparison method described above fails, the means test is still a possibility to show income eligibility for chapter 7 bankruptcy. It is also used for chapter 13 bankruptcy income eligibility purposes.

Conducting the means test starts similarly to the household income comparison test. The first step is to calculate average monthly income using the past 6 months. But what the debtor does with that figure is different in the means test. Here, the debtor will subtract their mandatory and reasonable monthly expenses from their average monthly income. Common examples are mortgage or rent, utility bills, groceries, transportation expenses, etc. The trustee will be reviewing the debtor’s financial situation to make sure that they aren’t spending egregious amounts for any of their monthly expenses. The number is left after subtracting expenses from average monthly income is disposable monthly income. When that number is negative, the debtor qualifies for chapter 7 bankruptcy, but not chapter 13 bankruptcy. It can also fall within a certain (low) range and qualify a debtor for bankruptcy.

While the means test can be used for chapter 7 or chapter 13 income eligibility, its aim is to show the debtor can’t pay their debts for chapter 7. For chapter 13, the point is to show that the debtor does have enough income to pay at least some of their debts after paying their monthly expenses. This is because in chapter 13 bankruptcy, bankruptcy costs, secured debts, and priority debts need to be repaid in full. Therefore, income needs to be above a certain level to qualify for chapter 13 bankruptcy.

Filing Strategically With Variable Income

After learning about bankruptcy income qualification, it’s easier to understand how to strategically leverage seasonal income for bankruptcy purposes. If your debts are piling up and you know you will need bankruptcy eventually, having variable income could mean qualifying for different chapters of bankruptcy during different parts of the year. For example, if you’re a server and earn tips during Arizona’s tourism season, you’ll probably have a higher average monthly income if you file at the tail end of that season. That might qualify you for chapter 13 bankruptcy, which could be a good thing if your primary concern is secured or priority debt. But if you file near the end of the slow season, your average monthly income may be lower, making it easier to qualify for chapter 7 bankruptcy. This is preferable when you mainly have unsecured debts to worry about. If the debtor still doesn’t qualify, they may file a Special Circumstances petition requesting to proceed with their chosen chapter of bankruptcy anyway. Here, the debtor should present evidence that their income will decrease in the coming months, like previous tax returns, reduced shift schedules, or lay-off letters from an employer. Doing these calculations correctly and timing your filing precisely are easier said than done. Convincing the court to grant a motion is even more difficult. It’s advisable to seek guidance from a bankruptcy attorney when using this strategy to qualify for your preferred chapter of bankruptcy.

Tips & Other Cash Payments In Bankruptcy

Despite what the laws say, it has long been customary to avoid reporting tips and other cash payments on tax returns. But the IRS doesn’t have the resources to pore over the filings of the average taxpayer like a bankruptcy trustee can for all of their assigned cases. Tips, overtime, unemployment benefits, and other payments must all be reported in a debtor’s bankruptcy schedules, or there could be serious consequences. The trustee can discover reporting discrepancies through the debtor’s bank account statements, credit card statements, and more. Such a discovery could cause debts to be excluded from discharge, case dismissal, or even bankruptcy fraud charges.

Some debtors hold misconceptions about which types of payments must be reported in bankruptcy. While unemployment benefits typically only reflect a fraction of what a worker previously earned, they must be included in bankruptcy income calculations. So do overtime and seasonal bonus payments. But domestic obligations, i.e., spousal support and child support, do not need to be included in a debtor’s income.

Discuss Your Potential Bankruptcy Filing With An Experienced Professional, Free of Charge

Bankruptcy can have powerful debt relief benefits, but there are also risks of severe repercussions if a petition contains mistakes and inaccuracies. Many debtors still choose to approach bankruptcy alone because of concerns about the up-front costs of retaining an attorney. Our firm strives to remove that barrier to filing by offering payment plan options starting as low as Zero Dollars Down. When you’re seeking quality legal representation in Chandler that won’t break the bank, start your search with our firm. Schedule your free consultation today by calling 480-833-8000.