Blog
Law Offices of Chance M. McGhee

Call Today for a FREE Consultation

210-342-3400

Archive for the ‘Qualifying For Bankruptcy’ Category

An Example Why Passing the Means Test May Be Easier in 2018

November 19th, 2018 at 8:00 am

Filing bankruptcy before the end of December may help you qualify for Chapter 7 bankruptcy. Here’s an example showing how this could work.  

 

The month of December is the month that people receive more income than any other month of the year. According to the federal Bureau of Economic Analysis (part of the U.S. Department of Commerce), for at least the past 9 years (2009 through 2017) U.S. personal income was the highest in December than in any other calendar month.

This may well be true for you personally. You may work a part-time seasonal job this time of year to help make ends meet. You may be getting a few larger paychecks because of more work hours or overtime. Or you may be fortunate enough to get a holiday or year-end bonus.

Last week’s blog post explained how filing bankruptcy during December can be smart if you receive extra income that month. It can help you qualify for Chapter 7, and avoid being forced into a 3-to-5-year Chapter 13 case. Today we lay out an example to show how this would work.

The Example

Let’s assume that the median income amount for your family size in your state is $64,577.

(That’s the current amount for a family of 3 in Kentucky. You can find the median income amount applicable to you on this chart. It’s from the means testing webpage of the U.S. Trustee Program. The chart is current for bankruptcies filed starting November 1, 2018, and is updated about three times a year.)

Assume that your regular family monthly gross income is $5,000, which would give you an annual income of $60,000. That’s less the median income amount of $64,577 provided above. So you’d think that you’d easily pass the means test.

But let’s also assume that you and/or your spouse were to receive an extra $2,500 during December. This money could be from a seasonal job, overtime, a bonus, or just about any other source.

Filing Bankruptcy During December

What would happen here if you filed a Chapter 7 bankruptcy case during December? The income that would count for the means test would be what you received during the six full calendar months before the date of filing. You don’t count anything received in December; only income during June through November counts.  That would be 6 months of $5,000, or $30,000; multiply that by two for an annual income of $60,000.  

Since $60,000 is less than the $64,577 applicable median family income amount, you’d handily pass the means test. You’d qualify to file a Chapter 7 case.

Waiting to File Bankruptcy After December

If instead you tried to file a Chapter 7 case in January, your income under the means test would be higher. The pertinent 6-month full calendar month period would now be from last July through December.  On top of the usual $5,000 income for 6 months—$30,000—you’d add the extra $2,500 money received in December. So the 6-month total would be $32,500. Multiply that by two for an annual income of $65,000.

Since $65,000 is more than the $64,577 applicable median family income amount you’d not immediately pass the means test. You may not qualify for filing a Chapter 7 case. Instead of likely being able to discharge (legally write off) many or possibly all of your debts within about 4 months you may be forced to pay on them for 3 to 5 years in a Chapter 13 case.

Having Income More Than Median Family Income

Even in this scenario of too much income, there’s a chance you could still pass the means test and qualify for Chapter 7. You’d complete the very complicated 9-page Chapter 7 Means Test Calculation form. Then if your “allowed expense deductions” leave you with too low of “monthly disposable income” you’d still pass the means test. (Whether your “monthly disposable income” is low enough turns on a formula comparing that amount to the amount of your “total nonpriority unsecured debt.”) Or you might also qualify for Chapter 7 by having expenses that qualify under “special circumstances.”

But these alternative ways of trying to qualify for Chapter 7 are much riskier than simply having less income than your applicable median family income amount. Our example above shows how to accomplish this with smart timing. You may be able to do the same by simply filing your case in December, or in whatever month would be most favorable for you.

 

Pass the Means Test by Filing Bankruptcy in 2018

November 12th, 2018 at 8:00 am

The timing of your bankruptcy filing can determine whether you qualify for quick Chapter 7 vs. paying into a Chapter 13 plan for 3-5 years.

 

Timing Can Be SO Important

There are lots of ways you could greatly benefit from meeting with a bankruptcy lawyer sooner rather than later. You may save yourself lots of money by choosing an option that would not be available to you later. 

There are many situations this could happen. Today we’ll address how filing sooner—say, before the end of 2018—might enable someone to pass the “means test” when that might not be possible later. Passing the means test means you’d likely qualify to file a Chapter 7 “straight bankruptcy” case. Otherwise you may be required to file a Chapter 13 “adjustment of debts” case.

Chapter 13 can be great in the right circumstances. But you don’t want to be forced into filing one quickly because you’re desperate for immediate relief from your creditors. If you had to file a Chapter 13 case because you didn’t have the flexibility to strategically time your filing, this could easily cost you many thousands of dollars. It could mean that you couldn’t discharge most of your debts in a matter of 3-4 months without paying anything on them vs. paying on those debts for 3 to 5 years.

Timing and Income in the Means Test

The means test requires people who have the “means” to do so, to pay a meaningful amount on their debts. If you don’t pass the means test you’re effectively stuck with filing a Chapter 13 case.

Be aware that a majority of people who need a Chapter 7 case successfully pass the means test. The most direct way to do so is if your income is no larger than the published “median income” amounts designated for your state and family size. What’s crucial here is the highly unusual way the means test defines income. This unusual definition creates potential timing advantages and disadvantages.

The Means Test Definition of Income

When considering income for purposes of the means test, don’t think of income as you normally would. Instead:

1) Consider almost all sources of money coming to you in just about any form as income. Included, for example, are disability, workers’ compensation, and unemployment benefits; pension, retirement, and annuity payments received; regular contributions for household expenses by anybody, including a spouse or ex-spouse; rental or other business income; interest, dividends, and royalties. Pretty much the only money excluded are those received under the Social Security Act, including retirement, disability (SSDI), Supplemental Security Income (SSI), and Temporary Assistance to Needy Families (TANF).

2) The period of time that counts for the means test is exactly the 6 full calendar months before your bankruptcy filing date. Included as income is ONLY the money you receive during those specific months. This excludes money received before that 6-month block of time. It also excludes any money received during the calendar month that you file your Chapter 7 case. To clarify this, if you filed a Chapter 7 case this December 15th, your income for the means test would include all money received from exactly June 1 through November 30 of this year. It would exclude money received before June 1 or received from December 1 through the date of filing.

The Effect of this Unusual Definition of Income

This timing rule means that your means test income can change depending on what month you file your case. To the extent you have flexibility over when to file, and if there are any shifts in the money you receive over time, you have some control over how much your income is for the means test when you do file your case.

So if you receive an unusual amount of money anytime in December, it doesn’t count if you file a Chapter 7 case by December 31. This unusual amount of money might be an employer’s annual bonus, a contribution from a parent or relative to help you pay expenses, or an unexpected catch-up payment of spousal/child support. Remember, if you file bankruptcy in December, only money received June through November gets counted.

Even relatively small differences in money received can make an unexpectedly big difference. That’s because the six-month income total is doubled to arrive at the annual income amount. So for example let’s say you got an extra $1,500 from whatever source(s) in December. If you file in December that extra doesn’t count, as just discussed above. But if you wait until January to file, December money is counted becasue the pertinent 6-month period is now July 1 through December 31. That extra $1,500 gets doubled, increasing your annual income by $3,000. That could push you above the designated “median income” for your state and family size. If so you’d likely not pass the means test and not qualify for Chapter 7, leaving you with Chapter 13 as your only option.

Conclusion

It is a fact that most people wait way too long before their initial consultation meeting with a bankruptcy lawyer. There are many very understandable reasons for this. But do yourself a favor and be the exception. See a lawyer not because you’re at the very end of your rope and need immediate relief from your creditors. Instead see one because you want to learn about your options. Do this sooner and you may have some significantly money-saving options that you might not have had otherwise. 

 

Why Timing Can Be So Crucial for the Means Test

October 9th, 2017 at 7:00 am

The timing of your Chapter 7 filing—a difference of even just a day or two—can affect whether you qualify for it based on your income. 


How could filing your Chapter 7 a day or two earlier or later make such a big difference?

Usually it doesn’t. But sometimes it actually does. We’ll explain here.

The Point of the Means Test

One of the main goals behind the most recent major amendment to the bankruptcy laws in 2005 was to require more people to pay part of their debts through Chapter 13 payment plans instead of writing them off in a Chapter 7 “straight bankruptcy.” One of the main tools in the law for accomplishing this is the means test. This test uses a rigid financial test to determine who has the means to pay something to their creditors. This test is supposed to stop people from “abusing the bankruptcy system.” Those who have the means to pay a meaningful amount to their creditors in a Chapter 13 case are required to do so.

Taking Advantage of the Rigid Means Test

The means test was written rigidly to take qualifying for Chapter 7 out of the hands of bankruptcy judges. They were seen as being too soft on people filing bankruptcy.

But in real life rigid rules can have unintended consequences. An experienced and conscientious lawyer can turn these consequences to your advantage, and avoid their disadvantages. Here’s how this can play out with the means test.

What’s Rigid about the Means Test?

In our last blog post we explained the income step of the means test. That step qualifies most people because once you pass that step you pass the test. You don’t have to go any further (into your allowed expenses, for example.)

This income step essentially compares the income you received during the six FULL CALENDAR months before filing bankruptcy to a standard median income amount for your state and your family size. The question is whether your income DURING THAT PARTICULAR PERIOD is no more than the applicable median income amount. If not then you pass the means test and get to file a Chapter 7 case. (There are limited exceptions to this but they’re rare so we’re not getting into them here.)

If your income IS higher than the median amount, you may still be able to file a Chapter 7 case. But you’d have to jump through some extra hoops to do so. There’s a bigger risk that you would be forced to go through a 3-to-5-year Chapter 13 payment plan. So having your income be below the median income amount makes your case simpler and less risky.

The mean’s test is rigid in its fixation on those six prior full calendar months. Combine this with the fact that almost all money that comes into your hands during that period is counted. It’s not just taxable income. The means test includes ALL income during that precise period other than social security, tax refunds, and a few other rare exceptions. This combination of a very specific window of time plus including irregular sources of money creates opportunities to change your income for purposes of the means test.

How Can Filing a Day or Two Earlier or Later Matter So Much?

It can matter because that can change the 6-month period, which can significantly change your income for the means test.  It’s clearest to show this by example.

Imagine you received some irregular chunk of money—a few catch-up child support payments, or an insurance settlement or reimbursement.  Not a huge amount, say $2,500, received on April 10 of this year. Your only other income is from your job, with a $45,000 annual salary, or $3,750 gross per month.

Let’s say that the published median annual income amount for your state and family size is $48,000. Notice that your salary alone of $45,000 is less than applicable median income amount. Even including the $2,500 extra income—so totaling $47,500—you’d appear to have less than the median income amount.

Applying the Means Test

But that’s not the way the means test calculates income. If you were to file a Chapter 7 case in October—let’s say, on October 31, Halloween—you’d count the money received in the period from April 1 through September 30. That would be 6 months of your $3,750 salary—$22,500—plus the extra $2,500, which equals $25,000. Multiply that by two to get the annualized amount of $50,000. That’s higher than the $48,000 median amount for your family size in your state. So you’d fail the income portion of the means test, and may not be able to file a Chapter 7 case.

However, if you’d just wait to file one day until November 1 then the applicable 6-month period changes. It jumps forward by 1 full month to the new 6-month period of May 1 through October 31.  Now that new period does NOT include the $2,500 you received in April. So your income during this 6-month period is $22,500, multiplied by 2 is $45,000. Now you’re under the $48,000 median income amount. That means you’ve passed the income portion of the means test, and so you qualify for your Chapter 7 case. You can skip the expenses and other parts of the means test, avoiding the risk of failing the test.  

 

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.

 

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.

 

The Military Exemptions from the Chapter 7 “Means Test”

March 18th, 2016 at 7:00 am

You qualify for Chapter 7 without having to pass the “means test” if you fit within these very specific military-related exemptions. 

 

Short Introduction to the “Means Test”

The “means test” determines whether you have enough income after your expenses to pay a meaningful amount back to your creditors. If you do, you don’t pass the “means test” and you don’t qualify for Chapter 7 “straight bankruptcy.”

But like many people who want to file a Chapter 7 case, you may easily pass this test simply by having low enough income. As long as your income is no more than the current published “median income” amounts for their state and family size (as being updated on April 1, 2016), you don’t have to consider the amount of your expenses—you automatically qualify for Chapter 7.

Even if your income is higher than the applicable “median” amount, you can often still pass the “means test” by having enough allowed expenses so that your disposable income is low enough.  And then even if you have too much disposable income you might still pass the “means test” by showing “special circumstances.”

The Advantage of Skipping the “Means Test”

But not everybody passes the “means test.” If not, their cases are either “dismissed” (thrown out) or changed into a Chapter 13 “adjustment of debts” case. A Chapter 13 case requires paying creditors as much as your budget allows for a period of 3 to 5 years. That’s in great contrast to a Chapter 7 case which usually “discharges” (legally writes off) most debts without any payment, and usually does so in about 4 months.

So it’s understandable why Chapter 7 can be a much better way to go than Chapter 13. And that’s why having a way to avoid the “means test” altogether could be very valuable.

Totally Avoiding the “Means Test”

There are two ways to avoid the “means test” related to military service: the disabled veteran and the active duty/homeland defense exemptions.

The Bankruptcy Code makes clear that under these exemptions you can completely avoid the “means test.” It states that “the [bankruptcy] court may not dismiss or convert [into Chapter 13] a case based on any form of means testing” if either of these exemptions apply. (See Section 707(b)(2)(D) of the Bankruptcy Code.)

The Disabled Veteran Exemption

You can avoid the “means test” if you are:

1) a “disabled veteran,” meaning:

a) you are entitled to veteran disability compensation by being least 30% disabled; or

b) you have been discharged from service, or released from active duty, because of “a disability incurred or aggravated in line of duty” (as defined in 38 U.S.C. Section 3741(1)), AND

2) Your “indebtedness occurred primarily during a period” in which you were either:

a) on “active duty,” meaning “full time duty in the active military service of the United States” (10 U.S.C. Section 101(d)(2)); or

b) “performing a homeland defense activity.” (See definition in 32 U.S.C. Section 901(1).)

On a practical level this second condition is a particularly tough one. If you incurred most of your debts BEFORE you went on active duty, but then became disabled during active duty and as a result couldn’t pay your debts and needed to file bankruptcy, this exception wouldn’t apply. Your “indebtedness” would not have “occurred primarily” during your active duty.

Or if you didn’t have much debt when you went on active duty, but became injured and disabled while on active duty and then incurred most of your debt AFTER being released from active duty because of your disability, this exception would not apply for the same reason.

On the other hand you may well not need the exemption in these situations because your income would likely be less than your state and family size’s “median income.” If so, you’d easily pass the “means test” and qualify for Chapter 7.

The Active Duty/Homeland Defense Exemption

This second exemption is somewhat broader. But careful because it has a quick deadline to qualify for it.

You may be exempt from the “means test” if at any time after September 11, 2001 you were (or still are) a member of the Armed Forces or the National Guard who served either in active duty or for the homeland defense for a period of at least 90 days.

Unlike the above disabled veteran exemption, it doesn’t matter when your debts occurred in relation to the time of your service.  

However to use this exemption you must file your Chapter 7 bankruptcy case either during your term of duty or within the period of 540 days (about a year and a half) after it ends.

Conclusion

The disabled veteran exemption is narrow because your indebtedness must have “occurred primarily during” your period of service. The active duty/homeland defense exemption is broader but you must file your Chapter 7 case during or within 540 days after completing your service.

Even if you don’t think you qualify for these exemptions, please remember that most people needing to file a Chapter 7 case can pass the “means test” and so don’t really need these exemptions from it.

 

Call today for a FREE Consultation

210-342-3400

Facebook Blog
Back to Top Back to Top