Blog
Law Offices of Chance M. McGhee

Call Today for a FREE Consultation

210-342-3400

Archive for the ‘median income’ tag

Good Timing Can Shorten Your Chapter 13 Case by 2 Years

October 11th, 2017 at 7:00 am


We show how wise timing in your filing of a Chapter 13 “adjustment of debts” case could shorten your payment plan from 5 years to 3 years.  


Chapter 7 vs. Chapter 13

Two days ago we showed the importance of timing in the filing of a Chapter 7 case. The timing can affect whether you can qualify to be in a Chapter 7 “straight bankruptcy” case. If your income is too high you may not pass the “means test.” If you can’t pass this test you’d instead have to go through a Chapter 13 “adjustment of debts” case. That requires you to pay for 3 to 5 years into a payment plan, instead of being able to “discharge” (write off) all or most of your debts within about 4 months.

But what if you need a Chapter 13 case? It can be the much better option in certain circumstances. If you have debts that can’t be discharged like recent income taxes or child/spousal support, or debts you want to catch up on like a home mortgage, Chapter 13 buys you time to take care of those special debts. There are many other reasons Chapter 13 may be better for you than Chapter 7.

So assume you want to file a Chapter 13 case. One important question is how long you will be required to pay into your payment plan. Sometimes you’d want to have as much time as possible to stretch out and lower your plan payments. But in other circumstances you’d just want to get it over with as soon as possible. Then you can get on with life, and if you want start rebuilding your credit.

Your “Income” Dictates the Length of Your Chapter 13 Case

There is no “means test” under Chapter 13. Yet the same unusual way of calculating income in the Chapter 7 “means test” is used in Chapter 13. That same unusual calculation of income determines whether your payment plan can be 3 years long or instead must last 5 years.

So let’s look briefly again at how income is calculated.

The Chapter 13 Calculation of Income

To calculate your income for this purpose:

  • includes almost all sources of money other than from Social Security (not just taxable income)
  • total all gross amounts received precisely during the 6 FULL calendar months prior to filing your case
  • multiply this 6-month amount by 2 for the annual “income” total
  • compare that annualized amount to the “median income” for your state and family size

You may finish your Chapter 13 case in 3 years instead of 5 if your income is no larger than the applicable “median income” for your state and family size.

The “median income” amounts are adjusted regularly and are available online. You can find those state-by-state amounts for cases filed starting May 1, 2017 and for several months thereafter here. (And if you’re reading this well after this date, check here to see if this table has subsequently been updated.)

If you want you can go through each of the specific steps in this calculation right on the official bankruptcy court form. Download or print the Chapter 13 Statement of Your Current Monthly Income and Calculation of Commitment Period (effective 12/1/15).

How Smart Timing of Filing Can Make Such a Difference

See our last blog post for an example how even just a day or two difference in the date of filing a case can put you over or under your applicable “median income” amount.

This is even more crucial in Chapter 13 than in Chapter 7. In Chapter 7 the income step is just the first step of the “means test.” Even with higher-than-median income you may be able to pass the “means test” based on your expenses or other considerations. But under Chapter 13 your income as calculated above determines whether or not you’re required to be in it for 5 years.

Important Practical Notes

Even if your income ALLOWS you to finish in 3 years you can usually take longer if you want. As mentioned above, you may want to stretch out and so reduce your monthly payments. But in this situation you’d not be REQUIRED to go the full 5 years. And you generally don’t pay any more to your creditors while doing so.

Also, if you ARE required to go the full 5 years based on your income that doesn’t always hurt you. To pay everything you want and need to pay may take that long, without necessarily paying more to your creditors.

However, there ARE situations in which based on your budget you could finish your payment plan in 3 years. Or other situations in which you could finish sometime between 3 and 5 years. In these situations being required to go the full 5 years means paying more to your creditors—sometimes much more. And it delays getting to that point in time when you can actually start your fresh financial start.

 

Timing Can Be Crucial for Passing the Means Test

July 10th, 2017 at 7:00 am

With smart timing you can take advantage of the unusual way that your “income” is calculated for the Chapter 7 means test.  

Passing the Means Test

We introduced the means test a couple of weeks ago and said that many people pass this test simply by having low enough income.  Their income is no larger than the published median income for their state and family size.

We also explained that income for this purpose has an unusual definition. It includes:

  • not just employment income but virtually all funds received from all sources—including from irregular ones like child and spousal support payments, insurance settlements, cash gifts from relatives, and unemployment benefits (but excluding Social Security);
  • funds received ONLY during the 6 FULL CALENDAR months before the date of filing, multiplied by two for the annual amount.

In other words, if you file a Chapter 7 case on any day of July, you count all funds received during the period January 1 through June 30. Then you double it and compare that to the applicable median income amount.

This very broad definition of “income” received within this very definite time period has some important tactical consequences for you. Under the right facts your “income” for the means test could shift significantly if you file your Chapter 7 case one month vs. the next. It could increase or reduce your “income” by enough to qualify or not qualify under Chapter 7.

We’ll show how this is possible through the following example.

An Example

Assume the following facts:

  • You have employment income grossing $3,750 per month that you consistently earned and received through the last several years.
  • Back in January you also received a modest auto insurance settlement of $2,500 from an insurance company.
  • The median annual income for your state and family size is $46,412.

Your “income” for means test purposes in July is:

  • 6 times $3,750 employment income = $22,500.
  • $22,500 plus $2,500 insurance proceeds = $25,000 total income from January 1 through June 30.
  • $25,000 times 2 = $50,000 annually.

Since $50,000 is more than the applicable median annual income amount of $46,412, you don’t pass the means test. (At least you don’t on the first income-only step. You may still pass by going through the expenses part of the test, but that’s beyond today’s blog post.)

So what happens if you don’t file your Chapter 7 case in July but rather wait until August? Here is the new income calculation:

  • 6 times $3,750 employment income = $22,500.
  • There’s no additional $2,500 from the insurance settlement because you received it in January while the pertinent 6-month period now is February 1 through July 31.
  • So $22,500 times 2 = $45,000 annually.

Since $45,000 is less than the applicable median annual income amount of $46,412, you now pass the means test. You qualify for Chapter 7. 

 

A Simple Example of Passing the Means Test

July 5th, 2017 at 7:00 am

 We show by example how the means test works, when a person qualifies for a Chapter 7 case simply by income.  


An Example is Worth a Thousand Words

You have to pass the means test to qualify for a Chapter 7 “straight bankruptcy. In a recent blog post we said that the easiest way to pass the means test is by your income. If your income is low enough you pass without having to look at your allowed expenses or special circumstances.  Let’s see how this works by way of an example.

Our Example—The Facts

Jeremy and Allison need bankruptcy relief. Their bankruptcy lawyer has recommended that they file a Chapter 7 case based on their circumstances. They have decided to do so.

They are both employed and get paychecks twice a month, on the 1st and 15th of the month. Jeremy has a gross income of $2,750 per month and Allison $3,250 per month.

They have two children who live with them in their home in Indiana.

“Income” for the Means Test

For purposes of the means test you count virtually all sources of incoming money (other than from Social Security). But you count only money received during the 6 FULL CALENDAR months before filing the Chapter 7 case.

Allison and Jeremy want to file their case during July. So they look at the income they’d received during the period from January 1 through June 30, the 6 full calendar months before. That’s 6 times $3,250 for Allison, or $19,500, plus 6 times $2,750 for Jeremy, or $16,500, or a combined $36,000. Multiply that by 2 to get an annual income of $72,000.

The Median Income for Your Family Size in Your State

Allison and Jeremy would pass the means test the most easily if their income, as just calculated, would be no larger than the median income amount for their family size in their state.

The median income amount for a group of people is similar to their average income amount, but not quite. It’s the amount at which half of the people have a greater income and half have less.

So for Jeremy and Allison, the median income is the amount at which half of the families of four people in Indiana have more income and half have less. How do they find out that amount?

It’s provided online by the U.S. Trustee. Here is a table showing the most current information of this writing. (This table is updated every few months so check here for more current median income tables.)

Notice that the median income for Jeremy and Allison’s family size and state is $77,566. Their income as calculated above, at $72,000, is less than this median income amount.

Conclusion

As a result Allison and Jeremy pass the means test simply on the basis of their income. They and their lawyer don’t need to go through the process of figuring out and deducting all their allowed expenses to find out if they pass the means test. Their income is low enough. It’s presumed that they don’t have enough money left over to pay a meaningful amount back to their creditors.

 

Household Size Really Matters for Passing the Means Test

June 30th, 2017 at 7:00 am

You can have more income for the purpose of passing the means test as your household size increases. But what IS your household’s size? 


Household Size in the Means Test

When introducing the means test a week ago we showed how passing that test often depends on your income. You start by comparing your income to the median income amount for your family size in your state.  As your family size increases you can have more income and still pass the means test.

For many people the size of their household is obvious. But not for everybody. Today’s blog post gets into how to figure out the size of your household when it isn’t obvious.

Where to Find the Definition of Household

The federal Bankruptcy Code does not provide a definition of household or how to determine its size.

The U.S. Trustee points us in the right direction. (That’s part of the U.S. Department of Justice which Congress tasked with enforcing the means test.) The U.S. Trustee has put out a “Statement of the U.S. Trustee’s Position on Legal Issues Arising under the Chapter 7 Means Test.” This Statement states:

  • “Household size” is the debtor, debtor’s spouse, and any dependents that the debtor could claim under IRS dependency tests. The USTP uses the same IRS test for the definition of both “household” and “family.”

It then refers to the Internal Revenue Service’s Publication 501 for the definition of dependent.

The IRS Definition

The IRS defines “dependent” (on page 11 of that Publication 501) as either a “qualifying child” or a “qualifying relative.” The IRS then spends 11 pages of fine print to explain its rules for those two terms. Here’s an overview of those rules. They are somewhat detailed but should help you determine your household size.

To be a “qualifying child”:

1. The child must be your son, daughter, stepchild, foster child, brother, sister, half-brother, half-sister, stepbrother, stepsister, or a descendant of any of them.

2. The child must be

(a) under age 19 at the end of the year and younger than you (or your spouse if filing jointly),

(b) under age 24 at the end of the year, a student, and younger than you (or your spouse if filing jointly), or

(c) any age if permanently and totally disabled.

3. The child must have lived with you for more than half of the year.

4. The child must not have provided more than half of his or her own support for the year.

5. The child must not be filing a joint return for the year (unless that joint return is filed only to claim a refund of withheld income tax or estimated tax paid). If the child meets the rules to be a qualifying child of more than one person, only one person can actually treat the child as a qualifying child.

To be a “qualifying relative”:

1. The person can’t be your qualifying child or the qualifying child of any other taxpayer.

2. The person either

(a) must be related to you in one of the ways listed under Relatives who don’t have to live with you, or

(b) must live with you all year as a member of your household2 (and your relationship must not violate local law).

3. The person’s gross income for the year must be less than $4,000.

4. You must provide more than half of the person’s total support for the year.

After All These Rules, One Important Twist

The U.S. Trustee’s Program’s Statement adds this potentially very important meaning of household:

The USTP departs from the IRS dependent test…  in cases justifying “reasonable exceptions” (e.g. a long standing economic unit of unmarried individuals and their children).

Considering how many millions of non-traditional households there are in the U.S., this “long standing economic unit” exception may be helpful for you in determining your household size and passing the means test. Talk with your local experienced bankruptcy lawyer about it.

 

No Means Test If You Have More Business Debts than Consumer Debts

June 26th, 2017 at 7:00 am

You only have to pass the means test if you have “primarily consumer debts.” If you have more business debts, skip the means test.  


The Consumer “Means Test”

Our last blog post introduced the “means test.” It’s used to see if you qualifying for Chapter 7 “straight bankruptcy.” If you don’t qualify, you may instead have to file a Chapter 13 “adjustment of debts” case requiring a 3-to-5-year payment plan.

But the means test only applies to consumer bankruptcy cases. Otherwise you can skip the means test.

The official Voluntary Petition for Individuals Filing Bankruptcy form asks the following two questions:

16a. Are your debts primarily consumer debts? Consumer debts are defined in 11 U.S.C. § 101(8) as “incurred by an individual primarily for a personal, family, or household purpose.”

16b. Are your debts primarily business debts? Business debts are debts that you incurred to obtain money for a business or investment or through the operation of the business or investment.

If you answer “no” to the first question (and usually “yes” to the second question), than you skip the means test. This can be a significant advantage because you may otherwise not qualify under Chapter 7.

How this Exception Fit’s into the Purpose of the Means Test

The purpose of the “means test” is to only allow you to go through a Chapter 7 case if you don’t have the “means” to pay a meaningful amount of your debts to your creditors. If your income is no more than the “median income” for your family size in your state, the law assumes you don’t have the “means” to do so. Next, if your income is more than the median amount, then your allowed expenses are carefully reviewed to see if you do have enough “means” left after your expenses.

When Congress created the means test, it decided to apply the test only to individual consumers, not to businesses and business owners.

The mechanism that Congress used to divide between consumers and business is the phrase: “primarily consumer debts.” All those with “primarily consumer debts” have to take the “means test” to qualify for Chapter 7 relief. Those without “primarily consumer debts” do not have to take the “means test.”

Not “Primarily Consumer Debts”

If the total amount of all your consumer debts is less than the total amount of all your non-consumer (business) debts, your debts are not “primarily consumer debts.” If so, you can avoid the “means test.”

Section 101(8) of the Bankruptcy Code defines a “consumer debt” at as one “incurred by an individual primarily for a personal, family, or household purpose.”

As you add up your consumer and non-consumer debts, realize that you may have more business debt than you think for two reasons.

First, debts that you would normally consider consumer debts might not be. For example, debts used to finance your business, even if otherwise straightforward consumer credit—credit cards, home equity lines of credit, and such—may qualify as non-consumer debt based on your business purpose of that credit. (Note the explanation to the question in the bankruptcy petition quoted above, that business debts include both those incurred in funding the business and in operating it.)

Second, some of your business debts may be larger than you think. For example, If you surrendered a leased business premises or business equipment you would likely be liable not just for the missed lease payments owed at the filing of the bankruptcy but also potentially for the string of future contractual payments, depreciation, and other possible charges.

Through a combination of these two considerations, your total business debt may be much more than you expected. So you might have more business debt than consumer debt.

Conclusion

You may not be in a position—given your income and the expenses you’re allowed—to pass the means test. If you have ANY business debts, be sure to ask your bankruptcy lawyer to see if you qualify for this not-“primarily consumer debt” exception.

 

The Chapter 7 Means Test

June 23rd, 2017 at 7:00 am

You have to pass the means test to qualify for a Chapter 7 case. It’s often an easy test to pass but one with some crucial twists and turns. 


The Purpose of the “Means Test”

You need to qualify to file a Chapter 7 “straight bankruptcy” case. The “means test” is the main step in qualifying. Its purpose is to not let you file a Chapter 7 case if you have the “means” to pay a meaningful amount to your creditors. If you do, then usually you would instead have to go through a Chapter 13 “adjustment of debts” case.

A consumer Chapter 7 case generally “discharges” (legally writes off) all or most of your debts. And it does so in a process that usually takes only 3 or 4 months.

In contrast a Chapter 13 case requires you to pay as much as you can reasonably pay to your creditors over a 3 to 5 year period. That usually means that under Chapter 13 your creditors get paid at least a portion of what you owe them. Often that portion is small, and sometimes most of your creditors actually get nothing. But the point is that Chapter 7 is SO much faster and easier. IF it’s the right option for you, you want to be able to qualify. And that means passing the means test.

Usually Easy, but Watch Out for the Twists and Turns

The reality is that most people who want to file under Chapter 7 can pass the means test. And most of those who pass do so quite easily.

Here’s why. There are a number of steps to the means test. But if you pass it on the first easiest step, then you’re done. You don’t have to go through the other more complicated steps.

This first step—the “median income” step—is relatively straightforward. But it has its own oddities—its twists and turns.

The “Median Income” Step

The idea behind this first step is that if your income is low enough, you have no money for creditors. You don’t have the “means” to pay a meaningful amount to the creditors.

If your income is low enough you pass the means test simply on the basis of your income. You don’t have to compare your income to your expenses to see if you have enough left over to pay to your creditors. (That’s the second step of the means test, if you don’t pass at this median income step.)

How low does your income need to be to pass the means test at this first step?

It can’t be more than the current median income amount for your state and your family size.

Median income is somewhat like the average income but not quite. It is the income amount at which half the people of the population have a lower income while half of the people has a higher income. The median income amounts for each state and family size are updated usually two or three times a year. The most recent update as of this writing was effective as of May 1, 2017. Tables of these median income amounts are published and made available.

“Income” Isn’t What You Think

“Income” has a very special and specific meaning here. To see if your income fits within your applicable median income amount, you need to know this meaning of “income.”

First, consider only money you received during precisely the SIX FULL calendar months before the filing of your bankruptcy case. For example, assume you are filing a Chapter 7 case on any day in the month of July. Then, you only count money you’d received from January 1 through June 30 of that year.

Second, we purposely said “money” instead of “income” here. That’s because you include virtually all money you received during the applicable six-month period from virtually all sources. It’s not just employment income, or money that’s taxable and shows up on your income tax return. Include essentially all sources of funds, except those received through any kind of Social Security benefit.

Once you have the total 6-month “income” amount, multiply it by 2 to get the annualized amount of “income.” Then compare that amount to the one for your state and family size in the published table.

Timing of Filing Often Changes Your “Income”

With this particular definition of “income,” whether you are above or below median income can change by the month. That’s especially true if you occasionally get money in irregular amounts and/or with irregular timing. Examples would be inconsistent child support, an annual or quarterly bonus from work, or any kind of lump sum distribution like a disability settlement or from a vehicle accident.   

An unusual payment can artificially inflate your “income” for the means test. A gap in usual payments can deflate your “income.” These can either push you temporarily above your applicable median income or below it. Because the impact is doubled (when you annualize the 6-months of income), even a moderate change can effect whether you pass this step of the means test.

The Rest of the “Means Test”

If your income is more than your applicable median income, you go to the second step of the means test. This involves a comparison of your income and allowed expenses to come up with your “disposable income.” The twist and turn here is in calculating your allowed expenses. We’ll get into that in our next blog post.

 

What Is Size of Your Family for the “Means Test”?

March 28th, 2016 at 7:00 am

You must use the right “number of people in your household” to qualify for Chapter 7. It’s not always obvious.

 

Our last blog post last week was about which state to use for the “means test” when you have connections to more than one state. The way you answer that question can be crucial for passing the “means test” and qualifying for Chapter 7 “straight bankruptcy.”

Same thing with the size of your family, as today’s blog post explains.

The Easiest Way to Pass the “Means Test”

As we’ve been saying, the easiest way to pass the ‘means test’ is for your family’s income to be no more than the published median family income amount for your family size in your state. Even if your income is higher, you might be able to pass the “means test” through a much more complicated and riskier method. But for today’s purposes we’re focusing on this most straightforward income-comparison method.

The Larger the Family the Larger the Median Family Income

Key to this income method is picking the right family size. As you might expect the larger the family, the higher the median family income amounts. This no doubt is in part because a “family” with only one person has only a single income earner, while one with two people potentially has 2 income earners, and so on average more income. Also, families with more children require more income, on average, to pay for the expenses of the additional children.

This is verified to be true for every single state if you take a look at the published median family income amounts provided by law (11 U.S.C. Section 101(39A)) by the U.S. Census Bureau. See this handy table of all of the states’ median family annual income amounts (effective starting April 1, 2016).

For example, in this table the median family income amounts in Utah are as follows, for families of:

  • one person, $54,314
  • two people, $59,972
  • three people, $67,082           
  • four people, $75,777
  • for each additional person, add $8,400

So, the larger you can truthfully and legally show that your family is, the more income you can have and still pass the “means test” by this most straightforward income method.

When Your Family Size is Unclear

These days less than half (46%) of children under 18 years old live in the “traditional” home of two married parents in their first marriage. In contrast 61% of children lived in such a home in 1980, and 73% did in 1960. So there are now lots more kids and step kids being raised in other circumstances: part-time in two different families, by single parents, by grandparents, and such.

So figuring out family size is a lot less simple than it used to be.

When in Doubt, What IS the Size of Your Family?

The simple answer to this question is: talk to the U.S. Trustee’s Office and to the IRS. Let us explain.

First of all, the answer is not to be found in the Bankruptcy Code. There is no definition of family or household size there.

Second, the U.S. Trustee Program is the arm of the U.S. Department of Justice that Congress tasked with enforcing the bankruptcy “means test.” As mentioned in the last blog post, the U.S. Trustee Program has put out a “Statement of [It’s] Position on Legal Issues Arising under the Chapter 7 Means Test.” As for family or household size, this Statement says:

  • “Household size” is the debtor, debtor’s spouse, and any dependents that the debtor could claim under IRS dependency tests. The USTP uses the same IRS test for the definition of both “household” and “family.”

It then refers to the IRS Publication 501 for its definition of dependent.

And third, the IRS defines “dependent” (see page 11 of that Publication 501) as either a “qualifying child” or a “qualifying relative.” The IRS then spends thousands of words on 11 pages of triple-column fine print to explain its rules for those two terms. But fortunately for us here, the IRS also provides an overview of those rules.

To be a “qualifying child”:

1. The child must be your son, daughter, stepchild, foster child, brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them.

2. The child must be (a) under age 19 at the end of the year and younger than you (or your spouse if filing jointly), (b) under age 24 at the end of the year, a student, and younger than you (or your spouse if filing jointly), or (c) any age if permanently and totally disabled.

3. The child must have lived with you for more than half of the year.

4. The child must not have provided more than half of his or her own support for the year.

5. The child must not be filing a joint return for the year (unless that joint return is filed only to claim a refund of withheld income tax or estimated tax paid). If the child meets the rules to be a qualifying child of more than one person, only one person can actually treat the child as a qualifying child. See Qualifying Child of More Than One Person later [within Publication 501] to find out which person is the person entitled to claim the child as a qualifying child.

To be a “qualifying relative”:

1. The person can’t be your qualifying child or the qualifying child of any other taxpayer.

2. The person either (a) must be related to you in one of the ways listed under Relatives who don’t have to live with you, or (b) must live with you all year as a member of your household2 (and your relationship must not violate local law).

3. The person’s gross income for the year must be less than $4,000.

4. You must provide more than half of the person’s total support for the year.

One last twist—the U.S. Trustee’s Program’s Statement adds this:

The USTP departs from the IRS dependent test (as does the IRS when it determines family size for collection purposes) in cases justifying “reasonable exceptions” (e.g. a long standing economic unit of unmarried individuals and their children).

Determining family size sure isn’t so straightforward, is it?!

 

What Is Your State for the “Means Test”?

March 25th, 2016 at 7:00 am

You must use the right “state in which you live” to qualify for Chapter 7. It’s not always obvious.

 

Our last blog post a couple days ago was about the unique definition for “income” as used in the “means test.” Understanding this definition and applying it to your advantage can be crucial for passing the “means test” and qualifying for Chapter 7 “straight bankruptcy.” (See that most recent blog post to calculate your own annual “income” amount.)

As we said, the “easiest way to pass the ‘means test’ is for your family ‘income’ to be no greater than the median family income amount for your family size in your state.” And we provided a link to a table of all the median family annual income amounts (effective starting April 1, 2016) for every state and family size.

But as we asked at the end of our last blog post, what if, after going through the steps of calculating your “income,” you’re not sure what state you should pick on the table of median family income amounts? What if you’ve moved recently? What if you have a business operated out of one state but you own a home in another state and live there much of the time? Or what if you’re married but maintain households in two states?

Different State Median Family Income Amounts Can Vary Significantly

If your life straddles two (or more!) states, it can make a big difference which state you use for the “means test.” For example, if you are single without any dependents, the state with the lowest annual “median family income” is Mississippi at $37,590 and the highest is New Jersey at $61,347, more than 63% higher. Or, if you have a family of 4, the lowest is Arkansas at $60,549 and the highest is Massachusetts at $111,595, more than 84% higher.

The Bankruptcy Code Doesn’t Say

For people who have lived and worked in the same state for years, it’s obvious what state they belong to. But if you have either moved recently or have personal or business connections in more than one state, it could be anything but obvious.

Federal bankruptcy law can be quite clear about which state you choose in dealing with other bankruptcy choices.

For example, the state in which you can file bankruptcy is wherever your “domicile, residence, principal place of business… , or principal assets.. .  have been located” for at least 91 days before the filing. (See 28 U.S.C. Section 1408.)

Or you can use a state’s property exemptions to protect your assets usually after 2 years of having your home in that state. (See 11 U.S.C Section 522(b)(3)(A)).

However, when Congress created the “means test” in the U.S. Bankruptcy Code, it only said that you compare your “income” to the “median family income of the applicable State.” The statute (11 U.S.C Section 707(b)) does not say anything about how to determine your “applicable State.”

The Bankruptcy Code’s definition of “median family income” (11 U.S.C. Section 101(39A)) does not address this. The phrase “applicable state” is simply nowhere defined by statute.

The “State in Which You Live”

The official bankruptcy form used to determine your “income” for “means test” purposes is called the “Chapter 7 Statement of Your Current Monthly Income,” Form 122A-1. It then has you compare your “income” to the appropriate median family income amount. This form asks you (at question 13) to “[f]ill in the state in which you live.”

The U.S. Trustee’s Office, part of the U.S. Department of Justice, is the major enforcer of the “means test.” One of its tasks is to see whether the above form is completed appropriately. It has put out a “Statement of [It’s] Position on Legal Issues Arising under the Chapter 7 Means Test.” On the issues we’re dealing with here, this Statement says simply that “[a]pplicable state is [the] state of residence at filing.”

What This Means in Practice

The implication of all this seems to be that you should use the median income amount for your family size for the state where you are living at the time your bankruptcy case is filed. It seems that if you are filing bankruptcy in a particular state because that is where you operate a business or it’s where you are domiciled (your permanent home even if you’re not there now), you wouldn’t use that state’s median family income amounts. Rather you can and must use the median family income amounts for the state where you are currently living.

But the law is vague. The U.S. Trustee’s Office’s Statement is only one opinion, even if it’s from an important source. These kinds of vague matters in the law are often left to local practices. These may be formal—local or regional federal court rulings. Or they may be informal—just the way a particular regional U.S. Trustee’s Office or local bankruptcy judge or judges tend to interpret this vague language in the bankruptcy statutes, the “applicable state.”

This is one of the reasons that you need the advice of an experienced bankruptcy lawyer. He or she has spent years, all day every day, immersed in not just the national bankruptcy statutes and rules, but also in nuts-and-bolts-policies and practices of local judges and other players in the system. Since choosing the right state can make the difference between qualifying for the 3-4-month-long Chapter 7 case instead of being stuck in a 3-to-5-year Chapter 13 one, the advice of a lawyer could be extremely valuable here.

 

What is Considered “Income” for the Chapter 7 “Means Test”

March 23rd, 2016 at 7:00 am

“Income” is not what you think it is—it’s much broader than usual and fixates on the 6 full calendar months before your bankruptcy filing.

 

Our last blog post a couple days ago was about an upcoming cost of living adjustment of median family income amounts. This adjustment is going in effect for bankruptcy cases filed on and after April 1, 2016. (See Section 101(39A) of the Bankruptcy Code.) These median family income amounts are important because they can determine whether you can pass the “means test” and qualify for a Chapter 7 “straight bankruptcy” instead of a Chapter 13 “adjustment of debts.”

That’s important because a consumer Chapter 7 case usually take only 3 or 4 months to finish. It usually does not require you to pay anything to most of your creditors. In contrast a Chapter 13 case usually takes 3 to 5 years, and requires you to pay all you can afford to your creditors throughout that period of time.

The easiest way to pass the “means test” is for your family “income” to be no greater than the median family income amount for your family size in your state. Here is a table of all the median family annual income amounts effective starting April 1, 2016 for every state and territory in the United States. The table includes different median income amounts for families of different sizes, from 1 to 4 people; for larger families add $8,400 for each additional family member beyond 4.

How Do You Compare Your “Income” to These Published Median Family Income Amounts?

It’s trickier than you might think to calculate your “income” to find out if it is no more than the published median income amount for your state and family size. Indeed we put “income” in quotes because that word has a very specific meaning for “means test” purposes.

“Income” includes money received during and only during a rather unusual time period. And “income” includes certain sources of money received during that time period but excludes other sources of money. 

The “Income” Time Period

The period of time during which your “income” is counted for the “means test” is precisely the last SIX FULL CALENDAR months prior to the day you file bankruptcy.

Because you count only money received during the prior FULL calendar months, you do NOT include any money received during the month your bankruptcy is filed. For example, if you file on a April 15, you don’t count any money received from that April 1 through April 15.

Because you count money received only the last SIX full calendar months, you don’t count any received just before that. For example, if you file bankruptcy on a December 15, you don’t count any money received on or before that May 31, even though it’s in the same calendar year. That’s because only money during the 6 prior full calendar months—from June 1 through November 30 of that year—counts.

What’s Included in and Excluded from “Income”

Virtually all forms of money received or paid on your behalf is included other than Social Security. The statutory language says to include

income from all sources that the debtor receives… without regard whether such income is taxable income,…  and… includes any amount paid to any entity other than the debtor… on a regular basis for the household expenses or the debtor or the debtor’s dependents… but excludes benefits received under the Social Security Act.”

Section 101(10A) of the Bankruptcy Code.

This may include income and payments from some unexpected sources.

As expected, all income from your employer is included—all gross wages or salary, as well as any tips, overtime, shift differentials, and commissions, WITHOUT subtracting any tax or other deductions.

If you operate a business or farm, have a profession, or have income from real estate, include all gross receipts during the 6-month time period. You can subtract operating expenses of that business, farm, profession or real estate, but only to the extent that they are “ordinary and necessary” ones. If the expenses are more than the income, you can’t use a negative “net” amount; just put $0.

There’s a line for entering all income in the form of “interest, dividends, and royalties.” If you own stock or other investments in which the dividends or other proceeds are automatically reinvested, include those dividends or other investment proceeds as income.

Include all pension and retirement income, other than Social Security payments (So include all non-Social Security governmental and private retirement income, as well as from 401(k)s and IRAs of any type.

Include unemployment compensation. Arguably some kinds of unemployment benefits are “benefits received under the Social Security Act” and so perhaps should be excluded. Talk with your attorney about this issue is locally enforced. Given how modest unemployment compensation tends to be, you may be well under the median family income amount for your family size and state even if it is treated as “income.”

Social security disability benefits are not included, but private disability insurance benefits are included.

Include any amounts paid by any other person or entity on a regular basis for your household expenses. It doesn’t matter whether the payments are made monthly, quarterly, annually or on any other regular basis. It doesn’t matter whether the payments are made without any written agreement. This includes payments from a roommate or housemate, a partner, parent or other relative, whether or not this person is living with you. Include child and spousal support. Include payments made directly to creditors on your behalf, such as for your apartment rental or your vehicle loan payments or insurance, or anything else.

Include other odd sources of income, such as any net gambling gains, cash gifts, proceeds of any litigation (including your share of any class action proceeds). Include any trust income.

But exclude income tax refunds and any repayments received on a debt owed to you.

Then What?

Add up all of such sources of income during the 6 full calendar months before your anticipated Chapter 7 filing. Then multiply that total by 2 to get the annualized amount. Compare that amount to the table of new median family income amounts referred to above. If your “income” is no more than the median family income amount in the table for your family size, then you pass the “means test” the easiest way to pass it, and you qualify for Chapter 7. (You might still pass the “means test” if your “income” is higher than the applicable “median family income” amount, but it’s more challenging and risky.)

New Questions

But what if when you try to compare your “income” to the median family income for your state and your family size, you don’t know which state to use or which family size?

Which state’s median income amounts do you use if you’ve moved recently, or if you are married but maintain households in two states?

What’s your family size if you have children who didn’t live with you all year, or are living with you but partly support themselves?

And if you’re married but only one spouse is filing bankruptcy, how do you factor in the other spouse’s income and expenses?

We’ll address these questions in the next blog post.

 

The New Median Income Amounts for the Chapter 7 “Means Test”

March 21st, 2016 at 7:00 am

Besides the many 3-year cost of living increases happening on April 1, 2016, new median income amounts also start applying on the same day.

 

Last week we finished a series of about a dozen blog posts related to an every-3-year cost of living adjustment of many of the dollar amounts that are within the bankruptcy statutes. Because inflation during the last few years has been relatively low, these dollar amount increases were modest. (See this notice in the Federal Register.) But they are still important because on the margins they can affect everything from whether you can qualify for bankruptcy, what assets you can keep, what debts you can “discharge” (write off), and how long your case will last. All these changes apply to bankruptcy cases that are filed on or after April 1, 2016.

Besides these every-3-year adjustments, bankruptcy law requires separate cost of living adjustments of the median family income amounts for each state and family size. (See Section 101(39A) of the Bankruptcy Code.) The next one of these median family income adjustments happens also on April 1, 2016. This is the topic of today’s blog post.

The Median Family Income Amounts Matter Because… ?

You qualify for a Chapter 7 “straight bankruptcy” case if your income is no more than the median family income amount for your family size and state. If so you immediately pass the “means test.”

Even if your income is somewhat higher you may still pass the “means test.” But that would then depend on whether your income is higher than the amount of your allowed expenses, and how much so. If still too high, whether you pass could depend on the amount of your debts.

So if your actual income amount is no more than the applicable median family income amount you pass the “means test” immediately. Otherwise you may or may not pass once you have to get into these other factors.

If you don’t pass the “means test” you would likely have to proceed instead under a Chapter 13 “adjustment of debts” case. That takes much, much longer—3 to 5 years instead of about 4 months with a Chapter 7 case. And instead of discharging most of your debts that quickly, under chaper13 you’d have to pay what you could afford during that 3-to-5-year span.

And even if you wanted to do a Chapter 13 case in the first place to benefit from its own many advantages, the median family income amount can be very important. If your actual income is no more than you applicable median family income amount, you are obligated to pay into your Chapter 13 plan for no more than 3 years. If your actual income is higher, you are obligated to pay for a full 5 years.

The April 1, 2016 Increases

The median family income amount adjustments are generally done twice a year, once in October or November and then sometime the following February through May. The data gathering is done by the U.S. Census Bureau and also made available for bankruptcy purposes by the U.S. Trustee’s Office (a branch of the U.S. Department of Justice). Here is a table of the ones effective starting April 1, 2016, and of the prior ones effective from November 1, 2015 through March 31, 2016.

For some idea of the median family income amounts, here is a list of them for 8 states, focusing first on the family sizes of a single person, showing the modest increases between these two time periods:

STATE

1 EARNER

1 EARNER

 

11/1/15-3/31/16

STARTING 4/1/16

Indiana

$43,422

$43,474

Kentucky

$41,333

$41,382

Montana

$41,692

$41,741

Oregon

$47,809

$47,864

Texas

$44,178

$44,230

Utah

$54,250

$54,314

W. Virg.

$43,054

$43,105

Wisconsin

$44,764

$44,817

And now here are the same 8 states, focusing now on family sizes of 4 people, again showing the increases between these two time periods:

STATE

FAMILY OF 4

FAMILY OF 4

 

11/1/15-3/31/16

STARTING 4/1/16

Indiana

$74,584

$74,673

Kentucky

$69,593

$69,676

Montana

$71,261

$71,346

Oregon

$76,240

$76,330

Texas

$72,612

$72,698

Utah

$75,687

$75,777

W. Virg.

$67,036

$67,116

Wisconsin

$85,859

$85,961

Please see our blog posts of March 7, 2016 and November 13, 2014 explaining how to apply these median family income amounts to your own income. You’ll get an idea at least whether you can pass the “means test” easily based solely on your income, as to both before and after April 1, 2016.

 

Call today for a FREE Consultation

210-342-3400

Facebook Blog
Back to Top Back to Top