Means Test in Bankruptcy; Gifts vs. Loans

Means Test in Bankruptcy; Gifts vs. Loans

The dreaded means test is one of the methods to determine eligibility to file bankruptcy for those who have primarily consumer debt.

The means test requires one to include the average of ALL gross income received from any source, other than social security and income received as benefits for victims of war crimes or terrorist acts, within the six calendar months prior to filing a bankruptcy case.    Thus, income includes everything even if it is not taxable income or considered income by the Internal Revenue Service.

One situation that arises frequently is where a relative or friend has given the debtor money to help them with their expenses during that 6 month period.

Whether this money is a loan or a gift can make the difference between whether or not one is eligible to file Chapter 7 means test vs. a Chapter 13 or Chapter 11 case, as well as possibly affecting the amount needed to be paid in a Chapter 13 or Chapter 11 bankruptcy case .

In short, if it is a gift received during that 6-month period, then it must be included as income for purposes of the Means Test.  If it is a loan, it does NOT get included, but in that event the party to whom the loan is owed MUST be listed as a creditor in the bankruptcy schedules (assuming the loan has not been repaid prior to filing the bankruptcy case).

If the loan has been repaid prior to filing the bankruptcy case, there may be other ramifications depending on the amount repaid and when it was repaid in relation to the bankruptcy filing.  This could be deemed a “preferential transfer” and should be discussed with your bankruptcy attorney.

Image Courtesy of:  Stevendepolo

By |2017-08-14T21:54:23+00:00July 11th, 2011|Categories: Bankruptcy Law, means test|2 Comments

About the Author:

Attorney Mark Markus has been practicing exclusively bankruptcy law in Los Angeles, California since 1991. He is a Certified Specialist in Bankruptcy Law by the State Bar of California Board of Legal Specialization, AV-Rated by martindale.com, and A+ rated by the Better Business Bureau. Google Plus