How a Government Shutdown Can Help You Pass the Chapter 7 Means Test

The Means Test is essential to qualify for Chapter 7 bankruptcy. While the government shutdown may be creating financial chaos for some, it offers a crucial opportunity: The temporary loss of income can strategically lower your average income to help you pass the Means Test. Learn how strategic timing is essential for this debt relief window.

By Alexander Hernandez, J.D., Professor, and Author of Consumer Bankruptcy Law (Routledge).

Government Shutdown & Chapter 7: The Means Test Opportunity

The current government shutdown is creating significant financial hardship, leaving countless federal employees and contractors without pay. While the stress of a sudden furlough is immense, this moment of financial distress can, in a strange twist of bankruptcy law, open a window of opportunity for debt relief that was previously closed: qualifying for Chapter 7 bankruptcy.

As a bankruptcy attorney, I’ve seen this pattern before, particularly during the economic fallout of COVID-19. It all comes down to the mathematical formula of the Means Test, and why timing is everything.

The Means Test- A Six-Month Look-Back: Your Key to Qualifying for Chapter 7 Bankruptcy

To qualify for Chapter 7 bankruptcy, you must first pass the Means Test. This test is designed to determine if your income is too high, then you have to file for  Chapter 13 bankruptcy.

The critical factor is how your income is calculated:

The Means Test does not look at your yearly salary. It calculates your Current Monthly Income (CMI) based on the average of your gross income received during the six full calendar months immediately preceding your filing date.

The Furlough Advantage: Reducing Your Average Income

If you are a federal employee who was recently furloughed for a full month (or longer) and received zero income during that period, your financial circumstances are dramatically altered.

Here is why this is a potential game-changer for Chapter 7 eligibility:

1.  Removing a High-Income Month: If you were previously earning a high, disqualifying salary, that one month of $0 income pulls your six-month average down significantly.

2.  The “Sweet Spot” for Filing: By strategically timing your bankruptcy filing to occur immediately after the month(s) with no income, you replace one of the higher-income months in your calculation with a zero-income month.

For example, a debtor whose income over 6 months was consistently high: $8,000 per month. That is likely too high to qualify for Chapter 7 bankruptcy. However, if one month they receive $0, their average income over six months is now $6,666.67 ($40,000/6) versus (48,000/6).

This reduction can often push a debtor’s CMI below their state’s median income, allowing them to automatically qualify for Chapter 7 where they otherwise would have failed.

Real-World Example

This precise scenario consistently played out during the COVID-19 pandemic, where many clients who a few months earlier didn’t qualify, suddenly could. The principle of timing is so critical that in my consumer bankruptcy law textbook, I cite a real case demonstrating this.

My client typically averaged $4,000 in monthly income, but earned $10,000 in commissions one month after everyone else at his place of employment was fired. That one unexpected month of high income caused him to fail the Means Test. How did I get him to qualify?

The month with the $10,000 commission was in month three of the look-back period. I simply advised him to delay the filing by four months, allowing that high-income month to fall outside the six-month window and restoring his average income.

The federal government shutdown presents the reverse opportunity: using a zero-income month to strategically lower a previously high average.

What About Retroactive Pay?

A key concern is: What happens when the government reopens and Congress grants back pay?

For the purpose of the Means Test, back pay is received after the bankruptcy petition is filed, so it does not count towards the CMI calculation. The Means Test looks strictly at the income received before the date of filing. While you will receive your back pay, it won’t retroactively disqualify your Chapter 7 case, provided you file before that payment is received.

Caution and Next Steps

This strategy is highly technical, and timing is critical. Filing too early or too late could lead to a different result, including a dismissal of your case or a required conversion to Chapter 13.

Professor’s Take: Do NOT rush to file without an attorney.  The one-month window of opportunity is narrow, but a small mistake can be costly.

The Current Monthly Income (Means Test) is only the first step. Even if you pass the initial median income test, the court or U.S. Trustee’s Office retains the right to question your filing as an “abuse” of the system based on the totality of your circumstances. However, the U.S. Trustee’s Office might also be working with limited staff because of the government shutdown. But a sudden, temporary loss of income like a government furlough is a strong defense against such a challenge.

If you are a federal employee or contractor facing financial ruin from the government shutdown, now is the time to consult with an experienced bankruptcy attorney. This temporary, devastating income drop may provide the necessary window to wipe out crippling debt and get the financial fresh start you need.

Colleges and universities can purchase my bankruptcy law textbook directly from Routledge Publishing. Paralegals and students who are buying single copies can do so via Amazon Books. To access my YouTube channel, click this link. You can also listen to my podcast on Spotify.

You can learn more about filing for bankruptcy and the bankruptcy petition via this link. Information on the bankruptcy court system, contact information for trustees, and your state’s exemptions can be found here. The federal bankruptcy exemptions are listed here. The latest version of the 341 Meeting of the Creditors can be found here.

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