This article is part of my bankruptcy alphabet series

People are Not Numbers

When numbers are used to identify people, it’s usually when they are in prison.   The Bankruptcy laws used to be about helping out people (and businesses) in need.   They were about equitable solutions to serious financial problems.   Laws in general are designed to help society as a whole, but one must never forget it is always about people.   When a potential bankruptcy client comes into my office with debt problems, it is very personal to them.   Most of my clients never imagined being in this situation, and they would hope that the laws (and their attorney) are there to treat them as individuals, and not numbers.

The New Bankruptcy Laws

Back in 2005 the Republican controlled Congress and President G.W. Bush passed sweeping changes to the Bankruptcy Code that had been in existence for several decades prior.   These “new bankruptcy laws” were designed to reduce bankruptcy eligibility to a numbers game instead of basing it on need and the overall good for society.

Prior to 2005 the overriding purpose of the bankruptcy laws was one of equity.   I discussed courts of equity in my bankruptcy alphabet post on Justice.   Bankruptcy judges at that time had far more ability to balance the needs of a bankrupt debtor to get a fresh start with the rights of the creditors to get paid.

With the new bankruptcy laws, Congress instituted a very complex “means test” to determine threshold eligibility to file under Chapter 7.  The means test, in its base form, takes any and all income received by the debtor in the six calendar months prior to filing the bankruptcy case and subtracts from that certain expenses allowed under IRS guidelines (one size fits all, apparently).

The Saving Grace is Attorneys

While bankruptcy attorneys are of course bound by the laws, experienced ones have figured out where the laws can be applied beneficially for their clients and how to maximize the effectiveness for their specific case.   Similarly, while Congress tried to reduce the flexibility bankruptcy judges have to make equitable rulings, there is still plenty of room for Judges within the laws to do Justice and reach a fair and just result in each case, hopefully never forgetting these are people, not numbers in front of them.

The best way to avoid being just a number in the bankruptcy process is to hire a bankruptcy attorney that understands where the laws have been, where they are, and where they may be going.

Others Writing on the Letter “N”:

• Naked–New York Bankruptcy Lawyer Jay S. Fleischman
• Never–Cleveland Bankruptcy Attorney, William Balena
• No Asset–Metro Richmond Consumer and Bankruptcy Attorney, Mitchell Goldstein
• No Asset Report–Honolulu Bankruptcy Lawyer, Stuart T. Ing
• Non-PMSI–Philadelphia Suburban Bankruptcy Attorney, Chris Carr
• Nondischargeable–Northern California Bankruptcy Attorney, Cathy Moran
• Nondischargeable–Metro Richmond Consumer and Bankruptcy Attorney, Mitchell Goldstein
• Nondischargeable Debt–Omaha Nebraska Bankruptcy Attorney, Ryan D. Caldwell
• Notice–Colorado Springs Bankruptcy Attorney, Bob Doig
• Non-exempt Property–Miami Bankruptcy Attorney, Dorota Trzeciecka
• Notice–Taylor, Michgan bankruptcy Attorney, Chris McAvoy
• Negative Notice–Jacksonville Bankruptcy Attorney, J. Dinkins G. Grange
• NACBA–Wisconsin Bankruptcy Lawyer, Bret Nason
• California Nothern Bankruptcy Court, Cate Eranthe
• Non-Attorney Bankruptcy, Peter Behrmann

Image Courtesy of lrargerich

This article is part of my bankruptcy alphabet series

Here’s something many don’t realize.  You can earn above the median income for your location and household size and still qualify for Chapter 7  bankruptcy.    What’s that, you say?  You’ve read online (or your “Friend” told you) that if you’re below the median income, you can file for bankruptcy without doing a repayment plan (such as in a Chapter 13 case) and if you’re above it, you cannot.

A Little Knowledge Can Be Dangerous

The eligibility requirements for filing bankruptcy, particularly Chapter 7 are extremely complex thanks to the changes in the laws that went into effect in 2005.     The median income is a part of the “Means Test” analysis which is ONE of the tests used to determine eligibility.   It is possible to be below the median income and still not be eligible for Chapter 7, and it is possible to be above the median income and qualify.

Below Median Income Doesn’t Mean Automatic Qualification

The median income is merely the starting point.  If you are below the median income, for the income you received from ALL sources EXCEPT social security in the six calendar months prior to commencing the bankruptcy case, then you “pass” the means test (or, more accurately, the means test will not apply in that case).

However, you can be below the median and your budget of “actual” current income and expenses showing surplus income that could render you unable to remain in a Chapter 7 case.

The Means Test and Why Above-Median Doesn’t Mean Automatic Disqualification

If you are above the median income, then the means test must be performed.  The means test is a mind-numbingly complex, and somewhat random, set of calculations that includes certain allowed IRS expense deductions from your income, and other actual expense deductions, such as mortgage payments, etc.   After going through the test, if you are showing the ability to make a certain amount of payments to your creditors,  a “presumption of abuse” will arise in the Chapter 7 case and you may need to either switch to a Chapter 13 repayment plan, or have your case dismissed.

Similar to the under-median case above, if you pass the means test as an above-median income debtor, you can still be ineligible for Chapter 7 based on your actual current income and expenses if they are showing a surplus available to pay your creditors, based on allowed expense criteria.

See an Attorney

In short, it is virtually impossible to correctly anticipate what will happen in your case without having a qualified bankruptcy attorney represent you, not to mention correctly completing the required means test and other forms.

For others writing on the letter “M” see:

• Matrimonial Law in Bankruptcy    Philadelphia Suburban Bankruptcy Lawyer, Chris Carr
  Means Test    Omaha and Lincoln, Nebraska Bankruptcy Attorney, Ryan D. Caldwell
  Means Test    New York Bankruptcy Lawyer, Jay S. Fleischman
  Meeting of Creditors    Colorado Springs bankruptcy Attorney Bob Doig
  Modify    Northern California Bankruptcy Lawyer, Cathy Moran
  Monthly Income    Metro Richmond Consumer and Bankruptcy Attorney, Mitchell Goldstein
  Mortgage Arrears    Hawaii Bankruptcy Lawyer, Stuart T. Ing
  Mistakes    Cleveland Bankruptcy Attorney, William (Bill) Balena
  Marriage    San Francisco Bankruptcy Lawyer, Jeff Curl
  Members of Household Wisconsin Bankruptcy Lawyer, Bret Nason
  Mortgages and Bankruptcy Taylor, Michigan Bankruptcy Attorney Chris McAvoy
• Means Test-Marin County Bankruptcy Attorney Cate Eranthe
• Median Income–Livonia Michigan Attorney, Peter Behrmann

Image Courtesy of Double–M

It's not mine--it was a gift!

This article is part of my bankruptcy alphabet series

Gifts come in many shapes and sizes and, while usually a welcome thing, can have unintended consequences in a bankruptcy case.  There’s basically two types of gifts:  Those you give, and those you receive.

Gifts Must Be Listed As Assets On the Bankruptcy Schedules

When preparing the papers to be submitted in a bankruptcy case, any competent attorney will ask their client to list all of their assets, because that is required by the Bankruptcy Code.   I’ve had many clients over the years give me their list, but omit items that were given to them as a gift.   When I am fortunate enough to avert disaster and discover this before their case is filed,  the reason clients give for omitting it is that they think since they didn’t purchase it, it isn’t an asset.   Huh?   If your rich relatives give you their $10 million dollar house, putting title into your name,  just because you didn’t purchase it, it isn’t yours?  Wrong.   Gifts are just as much of an asset as anything else.   If you own it, it’s an asset.  And if you don’t have sufficient exemptions available under applicable law to protect it, you could lose it (depending on which bankruptcy chapter you file).    Regardless, you must list it or else you could face the loss of your discharge under Section 727 of the Bankruptcy Code, and/or possible criminal sanctions.

Gift Income Counts Towards the Means Test

Another frequent scenario is family assistance.  That is, when a friend or family member gives (rather than loans) money to the debtor to help with living expenses.   Thanks to the new (as of 2005) means test created by Congress,  all income received in the six (6) calendar months prior to filing a consumer bankruptcy case counts towards one’s eligibility to file.   Thus, even if the debtor who wishes to file bankruptcy has no wage or unemployment income at the time they file, they could conceivably be ineligible to file a Chapter 7 case now because of income received as a gift from friends and family within that 6 month period.   Of course, the easy solution to this is to have those gifts be loans, or to wait more than 6 months after receiving them to file a bankruptcy case.

Gifts You Make to Others:  Fraudulent Transfers or Charity?

The other side of this coin is gifts that the person filing bankruptcy (debtor) makes.   The bankruptcy papers require disclosure of any gifts made to any entity in the 12 months prior to filing the bankruptcy case if it exceeds $200 to a family member, or $100 to a charitable organization.   It also requires disclosure of ANY transfers of assets made in the 2 years prior to filing the case, for any purpose outside of the “ordinary financial affairs” of the debtor.  Presumably this would exclude normal and regular gifts (such as the holiday or birthday variety).

The reason for these disclosures is to enable a Trustee or creditors of the debtor to determine if assets were essentially “squandered” which could otherwise have been used to pay the creditors.    If large enough and outside the ordinary financial affairs of the debtor, a Trustee can sue the recipient of the gift to recover the value thereof, and if the transfers are particularly large and obvious, it could be grounds for denial of the debtor’s entire discharge under Section 727 of the Bankruptcy Code.   Charitable organizations are usually safe from such gifts,  as are holiday and birthday gift recipients, especially if they were regular donations.

But, if you’ve been Johnny (or Judy) Generous giving out large gifts,  you better wait at least a year before filing a bankruptcy case (particularly Chapter 7).   In fact, to prevent the Trustee from recovering on a fraudulent transfer theory,  it needs to be at least 2 years, and possibly more depending on the laws of your state.

As always, it is very important to discuss all specifics of your situation with a qualified bankruptcy attorney before filing a case!  (See more on why hiring a bankruptcy attorney is so important).

Others playing the Bankruptcy Alphabet Game:

• Jay Fleischman believes G is for Garnishment
• Cathy Moran believes G is for Guaranty
• Ryan Caldwell talks about G for General Unsecured Creditors
• Cate Eranthe examines how G is for Gumshoe
• Stuart Ing explains how G if for Garnishment
• Bill Balena opines that G is for Good Manners
• Christopher Carr thinks G is for Garnishment
• Jenna Cho believes G is for Good to Me
• Mitchell Goldstein posits G is for Good Faith
• Bret Nason-Garbage,
• Chris Carr- Garnishment,
• Daniel Winter-Garnishment,
• Ray Kempinski-Gee!!!,
• Bob Doig-Goals,
• Chris McAvoy-Good Faith,
• Monica Shepard-Guilt
• Kurt O’Keefe-Feeling Guilty
• Peter Behrmann-Personal Guaranty
• Birmingham Bankruptcy-Garnishment

Image Courtesy of Howard Dickins

By now, most have heard of the dreaded means test used as one of the methods to determine eligibility to file bankruptcy for those who have primarily consumer debt.   As part of its calculus, 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 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 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:  http://www.flickr.com/photos/stevendepolo/

As many of you know, one of the bankruptcy  eligibility threshold factors to determine which chapter of bankruptcy one may file under (e.g. Chapter 7, chapter 11, or chapter 13) is the dreaded “means test” which uses income received in the six calendar months prior to filing your case and compares that to the census bureau’s “Median Income” for your State.

For the second period in a row, due to the declining economy, the median income is dropping and will go into effect for cases filed after October 31, 2010.  Thus, depending on how close you are to the limit, it may be important to file your case before November 2010.

In California, the median income for a 1-person household will be reduced to $3,936 per month; for 2-persons, $5,162 and a family of 4, $6,466.

Be sure to discuss the timing of your bankruptcy case with your attorney to maximize your chances of qualifying for Chapter 7 if possible, or reducing your obligations in a Chapter 13 case.

I was asked a question in a forum:  If a chapter 7 bankruptcy case gets dismissed for “failing” the means test, under 707(b) of the bankruptcy code (11 U.S.C. 707(b)), is there any time limit on re-filing?   The answer is, for most cases, “no.”

There are penalties for filing subsequent bankruptcy cases within one year after a prior case has been dismissed. The main penalty is that the automatic stay, which prevent creditors from commencing or continuing any legal action against the debtor, terminates 30 days after the petition is filed (and in cases of multiple dismissals, never goes into effect). However, this “penalty” is excluded from cases which are dismissed as a result of failing to “pass” the means test under 707(b) of the bankruptcy code (11 U.S.C. 707(b)).

A judge can still order a prohibition on re-filing a case for 180 days, but that is only usually done where there are harsh facts showing an abuse of the bankruptcy system.

Our question of the week comes from a user who asks:

I have been unemployed for nearly a year now and will be running out of unemployment benefits in about 3 months which will leave me with no income at all and I am single. The prospects of finding a job in my line of work anytime soon is looking pretty grim so I am seriously considering launching another business of my own but that will take at least a year. I make about $960 a month on unemployment and have no residual savings other than my 401k and own no real property. My personal property is limited to my 13 year old car, my clothes and some minor furnishings which really aren’t worth anything. My dischargeable debts amount to about $35,000 and are comprised of strictly credit cards and medical expenses. I have never filed bankruptcy before and have spent the last 10 years rebuilding my credit after paying off debts from a business I was forced to close, so it’s heartbreaking for me to have to seriously consider bankruptcy now.

Here’s what I would like to know.

1. With little income which is on the verge of disappearing can I file directly for a Chapter 7 or do I need to file Chapter 13 first and complete the means test?

Answer: The “means test” must be completed if you are over the median income in your State, given your household size, in order to determine what you are eligible for. The so-called “means test form” must be completed in any bankruptcy case. You can file Chapter 13 first, but from the above facts it sounds like you would qualify for a Chapter 7 case, but you need to have a comprehensive consult with a bankruptcy attorney in your area to make that determination.

Loan repayments to a 401k plan cannot be used as a budget expense on the means test.

The Ninth Circuit Court of Appeals ruled today, in the case of In re Egebjerg, that 401k loans are not a debt as defined in the bankruptcy code and as such, the amount of any loan repayment cannot be considered in calculating a debtor’s budget/ability to repay his/her debts.

The basic rationale is that since a 401k loan is repaying funds to the owner of the 401k, it is not an actual debt, and the funds used to repay it are not a necessary living expense.

There are tax consequences for failure to repay a 401k loan, and these may be able to be argued as an offset, but the loan repayment itself cannot be used to determine eligibility to file a chapter 7 case.

One of the most frequent questions bankruptcy attorneys are asked by potential clients is whether they should file bankruptcy, or use a debt consolidation company to make payments towards their debts.   For those lucky debtors who qualify for Chapter 7 (which requires no repayment of debts but allows in most cases for discharge of all dischargeable debts), the decision is markedly easier to make.

But what about those who have the ability to make some monthly payments to their creditors and don’t qualify for chapter 7?   Their primary bankruptcy option in many cases is Chapter 13, which allows for, usually, a partial repayment of the debt.   Armed with this choice, most people decide that debt consolidation, rather than filing a Chapter 13 bankruptcy case, is their optimal solution.   However, this is almost never true.

In Chapter 13, the amount you have to repay to your creditors will almost always be less than (or, at worst, equal) to what you will have to repay outside of bankruptcy.    This is true even if you are required to repay 100% of your debts in a Chapter 13 case.  Depending on various factors–primarily your income and expense– you can get a discharge of your debts in a Chapter 13 case repaying anywhere from 0% to 100% of your unsecured debts for 36-60 months.

Why is it better to repay 100% in a Chapter 13 rather than doing debt consolidation?  Because you do not have to pay for interest accrual on unsecured debts in a Chapter 13.   Even under the best consolidation deal outside of bankruptcy there is going to be interest paid.  Also, in Chapter 13 your repayment plan will be for a maximum of 60 months (and in many cases can be as little as 36 months).   This can result in significantly less paid out over time than one would have to pay in a debt consolidation arrangement.

So if you are in a position where you may have too many assets or income to qualify for a Chapter 7 case, but are having trouble managing your monthly payments on your credit cards or other unsecured debts, you should consult with a bankruptcy attorney about the possibility of filing a Chapter 13 case.   You very well may be able to pay off all your unsecured debts with affordable monthly payments in less than 5 years!

This is not a means test

The means test in bankruptcy is not a test like you take in school based on your memory.   The means test is a budget analysis created by Congress to supposedly determine whether one has the ability (i.e. the means) to repay all or a portion of their debts, which determines whether one  is ineligible to file for bankruptcy relief under Chapter 7, as opposed to  Chapter 11 or Chapter 13.

I say “ineligible” as opposed to “eligible” because in most court districts,  even if you “pass” the means test it does not automatically mean you qualify to file a Chapter 7 case.   There are other eligibility factors that come into play even if the presumption of abuse does not arise on the means test.  This will be discussed more below.

The Means Test Only Applies to Consumer Debt Cases

The means test only applies if one’s debts are primarily (i.e. more than 50%) consumer debts.   Consumer debts include secured mortgage debt obligations on a personal residence, as well as most credit card-type debts. The means-test also only applies if the total income received in the 6 calendar months prior to filing the bankruptcy case (explained more fully below) is above the median income for your state, given your household size. See the means test flow chart created by Judge Maureen Tighe of the United States Bankruptcy Court, Central District of California, as presented in the informative blog of the Moran Law Group.

So, What is the Means Test Exactly?

The analysis for the means test is extremely complex and requires an experienced bankruptcy attorney to properly calculate.  The basic definition can be seen here.

The more detailed and technical answer is:   The means test takes all income received (and this means ANY income, regardless of whether it’s taxable income, so that includes gifts, withdrawals from a 401k, and almost any other type of income EXCEPT social security income) in the 6 calendar months prior to filing the bankruptcy case–including that of your spouse, if any (see why this gets included)– and subtracting out certain allowed expenses.  These “allowed expenses” are mostly IRS-based allowances for living expenses, food, clothing, shelter, etc. and have little connection with reality.  There are specific allowances for secured debt payments, such as mortgages and car payments, but almost every aspect of the means test has been, is being, or will be challenged in the courts, because it is frequently nonsensical, internally inconsistent, and confusing.

It is not as simple as determining that your income is below or above the median income for your area and household size (and determining your household size is another hotly contested issue).  You need a qualified bankruptcy attorney familiar with the court decisions in your area, to properly evaluate your eligibility for bankruptcy.  (For example, self-employment income is not analyzed exactly the same way as wage-earner income from a job)

Passing the Means Test is Just the First Step

Which brings me back to the point of eligibility.   Passing the means test is just the first step. It is possible to pass the means test but still be showing–for example–a surplus in your current monthly income and expenses.   For example, let’s say you were unemployed for the 6 months prior to filing your bankruptcy case, but you just landed a new job that pays you $100,000 per year. In that instance, you would likely pass the means test and show you are eligible to possibly file a Chapter 7 case. However, you would most certainly draw an objection (via a Motion to Dismiss your case) from the US Trustee’s Office as having too much income.

Please Don’t Try This At Home!

The means test and assessing eligibility to file bankruptcy is a field of land mines and evolving interpretations of law.  As they say on television ad disclaimers, “We are trained professionals. Don’t try this at home”

Image Courtesy of JamesNaruke