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Bankruptcy Means Test – High Tax Debt May Be the Key to Avoid It

Posted by Michael S. Anderson | Dec 21, 2012 | 0 Comments

The Bankruptcy Code requires that you take a test to determine “means” or your ability to pay debt. If you fail the test or in other words, show enough income to pay a certain percentage of your debt, a Chapter 7 bankruptcy can't be filed unless…a legal exception to the testing requirement exists. 

Many people pass the test and not just those with low income. Many people with higher incomes also pass the test as a result of large mortgage debt, car loans, priority tax debt, child support, spousal maintenance, high medical expenses, or some combination of the above.

In fact, the upper income earner may be able to pass the means test more easily than a middle-income earner who has been careful not to incur certain debts.

Yes…it happens.

There is even a way to avoid the means test altogether. That's right…. some avoid the entire test and are able to file a Chapter 7 Bankruptcy without having income and budget closely scrutinized.

People who have debt that is primarily “Non-Consumer” debt, don't have to "take" the means test.

What is “Non-Consumer” Debt? Lets define it in a backwards fashion.

If the money borrowed was used to pay a personal, family or household expense or to purchase personal, family, or household goods, it is probably a consumer debt.

Otherwise, it is probably “non consumer”.

Debts used for business purposes are non-consumer debts.

Tax Debt is non-consumer debt because it is not incurred voluntarily to pay for household expenses.

To be repetitive: A person with more tax debt or business debt or a combination of both than all other consumer debt… can avoid the means test in Arizona.

Example:

Fred has $50,000.00 in credit card debt, a car loan for $20,000.00 and a $75,000.00 income tax debt as a result of a failure to properly calculate income taxes for a few years when he was in business. (Penalty and interest have doubled it).

The tax debt meets the requirements for discharge if a Chapter 7 Bankruptcy can be completed.

Fred has a steady job and he fails the means test.

Between his credit card payments and his IRS installment agreement he is finding it difficult to make ends "meet" nonetheless.

Because his tax debt is greater than his credit card and car loan debt together, he qualifies to file a chapter 7 bankruptcy.

Fred later files for bankruptcy and discharges his legal obligation on the credit cards and the tax debt.

If you have serious tax debt and consumer debt and are contemplating a chapter 7 Bankruptcy, but you are concerned that you will not qualify to file because of the bankruptcy means test…determine exactly what debts you owe and determine whether the tax or business debt totals are greater than all of your consumer debt combined.

If they are, chapter 7 bankruptcy may be an option for you to consider.

About the Author

Michael S. Anderson

Michael Anderson has been representing Arizona clients with tax debt problems for almost two decades and has helped his clients eliminate millions of dollars in tax debt. His tax debt practice is limited to helping individuals and the self-employed who have serious IRS problems.

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