Bankruptcy Look-Back Periods: What You Need to Know

As you plan for bankruptcy, one important element to understand is the look-back period. What is a look-back period, and how does it apply to three parts of the bankruptcy process? Here are a few answers. 

What Is a Look-Back Period?

A look-back period is a period of time in the past used to assess certain types of transactions. A pension company might, for instance, look back at a person's income over three or five years to determine what their average salary was or what the highest salary was. This information is then used to figure benefits upon retirement.

Look-back periods in bankruptcy filing seek to accomplish one of two things: they may identify income ranges or look for specific transactions. These look-back periods are important because they help decide such things as how much your repayment plan is, whether you qualify for a type of bankruptcy, or what transactions may be suspect. 

How Does the Means Test Involve a Look-Back Period?

Anyone who wants to file Chapter 7 (liquidation) bankruptcy must first face a look-back period as part of the means test. The means test determines your income over a period of time and uses this to either qualify you or disqualify you for Chapter 7 bankruptcy. Generally, the income look-back period is 6 months backward from the last day of the month prior to your filing date.

Your income during the look-back period is added up to find your typical average monthly income. This is used to determine if you qualify for Chapter 7 or must choose Chapter 13. Then, it can be used to help come up with your repayment plan in Chapter 13.

The challenge of this look-back period is that it may not be accurate. Because it includes things like one-time bonuses and it may not reflect a recent change in income, you may need to seek extenuating circumstances during the means test. 

What Transactions Are Assessed During a Look-Back Period?

All bankruptcy filers must also expect a look-back period designed to find evidence of transactions that violate the bankruptcy rules. How do these operate? 

First, the look-back period for payments known as avoidable preferences can be anywhere from 90 days to a year, depending on state rules and the type of creditor. The trustee will assess payments made during this time in case any of them wrongly prioritized a creditor. If they find payments that don't meet the bankruptcy court's rules, the trustee may void the payment and request that money back. 

For instance, perhaps you paid off a Christmas loan from your grandparents but haven't paid your credit card bills during the look-back period. Even though you want to prioritize paying Grandma and Grandpa, the bankruptcy court may treat their loan the same as your credit cards. Therefore, both your family and the credit card company had equal rights to the money you paid your grandparents. 

The second type of transactions sought are potentially fraudulent ones. The look-back period for these is generally between two and ten years. During this time, charges or debts racked up for luxury purchases and withdrawals of cash are suspected to be fraudulent. The court may assume that you didn't intend to pay them back. This is a misuse of the bankruptcy system, and you would have to prove otherwise. 

How Can You Avoid Trouble With Look-Back Periods?

Look-back periods have the potential to derail your bankruptcy plans, so you should seek professional legal assistance to prepare for them.  Custer, Custer & Clark LLC Attorneys at Law has aided Georgia residents with all their bankruptcy needs for more than 80 years. Call today to discuss your look-back period concerns and get the answers and guidance you need.