Changing view of when to file bankruptcy

The Supreme Court’s recent decision in Lanning and the application of the infamous “means test” to a client’s changing income picture has changed my advice about when to file bankruptcy.

My standard advice to clients newly unemployed who see clearly they won’t be able to pay their existing bills has been to wait.

• Wait until you can see things improving.
• Wait til you have acquired something that a creditor with a judgment could take from you.
• Wait til you have an income such that my fee doesn’t take food off the table.

The Kagenveama decision holding  that the means test was mechanical and meant what it said about how we measured ability to pay creditors.  The means test, after all, was the statute to end judicial discretion on this subject.  I knew that as long as we were measuring ability to pay by looking backward into a period of unemployment, my client would pass the means test.

Now, Lanning says the court can take into account, on ability-to- pay issues, changes that are virtually certain to occur in the future.  Bingo, the future income of my previously unemployed client now must be factored into the mix.

In the usual fashion of Supreme Court decisions, the justices don’t tell us how to do that.  Lanning dealt with a significant, one time payment in the look back period which distorted the current monthly income average.  In that case,  being decoupled from the mechanical means test meant the bonus could be excluded from the  calculation.  We aren’t told how to deal with a future of steady, level income replacing months of no income.  Does the means test become irrelevant on those facts?

Since I’m not anxious to have my clients be the next test case if I can help it, I’m changing my advice:  let’s consider filing sooner rather than later, so we are confident that finally getting reemployed isn’t going to doom the client to failure on the means test.

On doing the means test yourself.