Since 2005, filing a Chapter 7 Bankruptcy is not guaranteed. In fact, you have to pass one of two tests in order to get to file a Chapter 7 Bankruptcy. The tests are collectively called the Means Test. You have to pass the Means Test in order to file a Chapter 7 Bankruptcy. You only need one:
The state test is an easy one to describe, but one that may be difficult to pass for half of the citizens of Arizona. Each state has what is called a Mean Income. The mean income is the average of all the income earned by all the citizens of the state of Arizona. Because of the large affluent population, Arizona’s mean income is respectable. If you are below the mean income in the state, you win. You get to file a Chapter 7 Bankruptcy. It is that easy.
In order to determine your actual income to apply the test, you need to add up all of the income you received from any source during the last full six months before you filed. This does not mean you count back six months from the filing date. That would be far too easy from the same people that wrote the tax code. You account for the six full months beofe you filed. For example, if you file on December 25, you would calculate all of the income you received from any source in November, October, September, August, July, and June. You would not count the income you took home in December because it was not a full month. If you think this is confusing, you should see what we do have to calculate with the December income. Need I say anything else for you to realize that you need an experienced Chapter 7 or Chapter 13 Bankruptcy Lawyer to handle your case? Contact us today!
The Federal Means Test is much more difficult. In the Federal Means Test you take into account many things in addition to your income. Your income is determined by your actual mean income over the last full six months before filing the bankruptcy.
When considering use of funds from your 401(k) you will be will likely have several choices. The most obvious choice is to take a distribution from your 401(k). You can do this for a plethora of reasons including a financial hardship. This will result in significant negative tax ramifications, but it will allow you to access your funds early.
If you have the option, it is a much better choice to take a loan against your 401(k). If you end up filing bankruptcy, your 401(k) will still be protected by exemptions. Your distribution will not be potentially considered as money received in the last 180 days for determination of qualification for Chapter 7 bankruptcy. Most importantly, if you end up in a Chapter 13 bankruptcy, you will be able to use your payment on the 401(k) loan to reduce your Disposable Net Income and pay it through the plan. You will save tax consequences and help your bankruptcy position by taking a loan.