Blog
Law Offices of Chance M. McGhee

Call Today for a FREE Consultation

210-342-3400

Archive for the ‘disposable income’ tag

The Chapter 13 Plan

July 24th, 2017 at 7:00 am

Chapter 13 revolves around your payment plan, which you propose based on your budget, and possibly negotiate with creditors and the trustee. 

 

In our last two blog posts we introduced Chapter 13 “adjustment of debts” bankruptcy. We explained how to qualify for it and how it can buy you extremely valuable time. Today we get to the heart of this option: the Chapter 13 payment plan.

The Length of the Plan

A Chapter 13 case almost always requires a 3-to-5-year payment plan. That may sound like a long time, but the length itself is often an advantage. That’s because your Chapter 13 plan often has you paying special debts that you want or need to pay, and the more time you have the less you have to pay each month. That makes achieving your plan goals easier and more realistic.

Whether a plan has to be at least 3 years long vs. 5 years depends on two main factors. First, your income plays a major role. Without explaining this in detail here, relatively lower income results in a minimum 3-year plan. Higher income results in a 5-year plan. 

Second, even if your minimum plan length is 3 years, you may want to stretch it out longer. You’d do that to reduce how much you pay each month into the plan. 

Your Chapter 13 Plan

Your plan is a blueprint for how you will deal with your debts for the 3 to 5 years of your Chapter 13 case. It must meet a list of requirements. See Section 1322, “Contents of plan,” of the U.S. Bankruptcy Code.

The core of the plan states how much you will pay to ALL of your creditors each month, and who gets paid from that amount. There are other provisions in the plan that don’t directly involve money. We’ll cover these in more detail in upcoming blog posts.

The Plan Approval Procedure

You and your bankruptcy lawyer prepare and then present your Chapter 13 plan to the bankruptcy court. This is usually done at the same time as your lawyer electronically files your case. But sometimes the plan is filed a week or two later, especially if your case was filed in a hurry.

Your creditors receive a copy of your plan and are allowed limited kinds of objections to it. If your plan follows the legal requirements the creditors usually don’t have much room for objection.

The Chapter 13 trustee also has a role in determining whether the plan meets the appropriate rules. The trustee suggests changes, usually in the form of objections. Usually these are resolved informally between the trustee and your lawyer. They often involve only minor tweaks in the plan terms, so that it’s still meeting your intended goals.

The bankruptcy judge resolves any disagreements about the plan between you and your creditors, or between you and the trustee, as needed. This usually happen quite quickly, although can delay the approval of your plan for several weeks.

The approval of a plan is called its confirmation, and usually takes place at a confirmation hearing. Your lawyer usually attends, but you almost never need to. The confirmation hearing usually happens about two months after your lawyer files your case. But it can be postponed (“adjourned”) once or even more often if there are objections which take time to resolve.

The judge approves your plan by signing a confirmation order. Your confirmed plan plus the confirmation order together largely govern your relationships with your creditors throughout the rest of your Chapter 13 case.

Next…

In our next blog post we’ll cover how a Chapter 13 plan deals with the different categories of your debts.

 

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.

 

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 If I’m Too Far Behind on My Rent?

February 10th, 2017 at 8:00 am

In a Chapter 13 “adjustment of debts” you have much more time to get current on your residential lease agreement than under Chapter 7. 


The Challenge under Chapter 7

Our last blog post showed how Chapter 7 “straight bankruptcy” can help you keep your home or apartment lease. Mostly it clears away other debts so that you can better afford your rent payments. Hopefully, if you’re already behind on those payments, it’s easier to catch up when you no longer have other debts.

But the disadvantage with Chapter 7 is that, if you are behind, you have very little time to catch up. Most of the time you need to get current within a month or two after filing the case. That’s because Chapter 7 cases are completed very quickly, giving you only brief protection against your landlord.

This short timetable presents a major challenge because usually you’re cash poor when you file bankruptcy. Often you’re pushed into bankruptcy because of a cash-depleting event like is a paycheck or bank account garnishment. You may be behind not only on rent but also on other obligations like utilities or rental insurance. That could additionally put you in breach of your lease agreement. Plus you may also be behind on other very important obligations like your vehicle loan or child support.

The short break you get from collections under Chapter 7 is often just not long enough to catch up on rent. That’s particularly true if some of your debts are of the type that Chapter 7 doesn’t discharge (legally write off).

The Chapter 13 Solution

The broad overall advantage of Chapter 13 is that it buys time. And that’s true with a residential lease agreement on which you owe late rent payments. Instead of having only a couple months to catch up, under Chapter 13 you have many months, or even possibly a couple years, to do so.

That’s potentially reason enough to file a Chapter 13 case, even though it takes several years instead of several months. The longer length gives you the advantage of more time to catch up on the rent.

An Example

The difference between Chapter 7 and 13 here is best shown by an example.

Imagine that you are two months behind on a home rental of $1,500 per month, or $3,000 behind. You also owe the IRS income taxes for 2014 in the amount of $10,000. Your paycheck was just garnished by the IRS, leaving you worse than broke. You’re also 5 months behind on your $500 monthly child support. Your ex-spouse just turned you over to the support enforcement agency to force you to pay up. And your landlord just informed you it’s about to file an eviction proceeding.

In spite of all this you desperately want to stay in your rental. It’s in a great location for your work and your kids’ schools. Besides, you’d have no way to come up with the first and last month’s rent for a new place. Your bad overall credit record and now your bad rental record would make qualifying for a new place very doubtful. So you understandably want to keep yourself and your family where you are now if at all possible.

If You Didn’t File Bankruptcy

Without filing bankruptcy, assuming you have no way of coming up with the $3,000 back rent, you would likely be evicted within a few weeks. In the meantime, the support enforcement agency can take very aggressive collection actions against you. That could include the suspension of your driver’s license, as well as any occupational or professional license. You could maybe work out a monthly payment plan with the IRS. But given the other extreme financial pressures on you it’s highly doubtful that you could reliably stick to any commitment.

You’d be evicted and continue to overwhelmed by debt. This is not a pretty picture.

Under Chapter 7…  

A “straight bankruptcy” would not likely help enough to save your home.

You’d get a 3-4 month break from the IRS’s collections. But you would not discharge (legally write off) that $10,000 tax debt because it’s not old enough to qualify. So very quickly you’d be back in their crosshairs.

The Chapter 7 filing wouldn’t give you ANY break from the support enforcement agency’s garnishments and potential license suspensions.

Somehow in the midst of all that you’d need to have quick access to the $3,000 in back rent. Maybe you have so much in other debts that not paying them would free up tons of money every month. But most people filing bankruptcy have already stopped paying a lot of their debts, so that likely wouldn’t help enough.

Chapter 7 simply doesn’t help most people in these kinds of situations enough.

Under Chapter 13…

Filing instead an “adjustment of debts” case would much more likely let you to stay in the home.

Your Chapter 13 filing would immediately stop all collections by the IRS, the support enforcement agency, and the landlord. And that stopping would likely last for the full 3-to-5-year length of the case. Your budget would determine how much you would realistically pay to ALL of your creditors each month. That monthly “Chapter 13 plan payment” would be divided among your creditors. It would pay the IRS, support enforcement, and the back rent before and instead of paying any other debts.

As a result, you would eventually completely catch up on the rent, likely within a year or two. (And you’d pay each new month’s rent on time as well, as provided in your budget). In the same way you’d also eventually bring your child support current, and pay off the income tax debt. To the extent that you’d have any “disposable income” beyond that, it would go to your remaining debts.

So, at the end of your Chapter 13 case you’d be current on your rental and child support, and you’d have paid off the income taxes. To whatever extent you didn’t have enough “disposable income” for the other debts, they would be discharged.

You would have succeeded in staying in your home, and be debt-free.

 

Objecting to a Proof of Claim to Defeat a Creditor

January 2nd, 2017 at 8:00 am

If your liability dispute with your creditor spills into your Chapter 13 case, the bankruptcy court may be a good forum to fight it out.

 

Our last three blog posts were about objecting to a creditor’s proof of claim in a Chapter 13 case. Today we look at situations when this is the most important part of your case.

Bringing a Liability Dispute to the Bankruptcy Court

It’s not unusual that a dispute with a single creditor forces a person into bankruptcy. Often it’s just one otherwise ordinary creditor which is more aggressive than the others, suing you ahead of the others, and then garnishing your paycheck or bank account.

Sometimes it’s not just any extra-pushy creditor, but rather one that you’ve been fighting for quite a while. The fight you are having with that creditor may be the main reason why you filed bankruptcy.

Maybe you were in a serious vehicle accident, and did not have enough insurance coverage. You are being accused of causing the accident but don’t believe you were its primary cause. Because of major injuries to others you potentially owe hundreds of thousands of dollars.

Or you operated a business that looked promising for a while but then failed. You were accused of mismanagement by a partner or investor and were sued. Fighting this lawsuit has drained you financially.

Or perhaps you were accused of unduly influencing a parent or other family member to change his or her will. That turned into a contentious lawsuit against you.

The attorney fees and other costs of fighting the dispute have pushed you over the financial edge.

You’re in a Chapter 13 Case

Assume you either didn’t qualify for Chapter 7, or you needed the special tools of Chapter 13 to deal with special debts like your home mortgage or income taxes. So you’re in a Chapter 13 “adjustment of debts” case.

When a Single Creditors’ Proof of Claim Amount Makes All the Difference

As we discussed in recent blog posts, sometimes the amount of debts you have does not change how much you need to pay into a successful Chapter 13 case. But often it does matter. Your main adversary before you filed the Chapter 13 case may still try to make you pay too much to it through your payment plan. Or that adversary may even jeopardize your ability to have a successful case.

For example, your financial circumstances may require you to pay 100% of your debts in a Chapter 13 plan. If so your liability on a large claim could substantially increase how much and/or how long you’d have to pay. Assume you could otherwise finish your plan in 36 months by paying $750 monthly into your plan. An additional $18,000 proof of claim by your adversary could force you to pay that $750 monthly for two additional years. An even larger claim could force you to pay more than you could reasonably pay each month. If that proof of claim resulted in more debt than you could pay in 5 years, Chapter 13 would cease to be an option.

One way to solve these problems is to object to this adversary’s proof of claim.

Failure to File a Proof of Claim on Time

If you believe you don’t owe an adversary anything, you’d still list the disputed claim in your schedule of creditors. Otherwise you lose the opportunity to discharge (write off) that disputed claim.

Your adversary has a limited time to file a proof of claim with the bankruptcy court. If it fails to do so on time, you don’t have to pay it anything in your Chapter 13 case. The claim is then discharged without any payment at the successful completion of your case.

But it’s not likely that your adversary would mess up like this.

Objection to a Proof of Claim

More likely, your adversary would file a timely proof of claim. That claim would stand and you’d have to pay it under the terms of you plan unless somebody—usually you—objects to it.

If you object, and your adversary doesn’t respond, the claim would be paid according how you state in your objection. So if your objection states that you owe nothing at all on the claim, again you would pay nothing.

It’s not unheard of that your adversary would simply not respond to your objection. Just like you, it may be tired of paying attorney fees, likely now also to a bankruptcy specialist. Your bankruptcy documents filed under oath may reveal to your adversary better than ever before that you have no pot of gold and so it’s wasting its time and money chasing you.

Responding to Your Objection

If your adversary does respond to your objection, the bankruptcy court could potentially decide whether you have any liability on the claim, and/or its amount. If a lawsuit on this was already pending in another court when you filed bankruptcy, the bankruptcy court may require the liability dispute to go back to that prior court to determine your liability.

Even so, for the reasons mentioned above there’s usually less incentive for your adversary to keep fighting you as aggressively as before.

Conclusion

If you are in a Chapter 13 case which is affected by how much debt you owe, your main adversary may mess up and fail to file a proof of claim. Or if it does file a proof of claim but you object to it, your adversary may fail to respond. Even if this adversary does jump through all the procedural hoops, its prospect of paying additional costs and a receiving a limited payoff usually forces it to be more pragmatic and settle the dispute.

 

Creditors Paid Nothing under Chapter 13

December 19th, 2016 at 8:00 am

Chapter 13 payment plans usually have you pay something to all of your creditors. But not necessarily. Certain creditors may get nothing. 

 

Our last blog post was about the “discharge”—the permanent write-off—of debts through a Chapter 13 “adjustment of debts.” This discharge happens at the end of a successful case, which usually takes 3 to 5 years.

Misconceptions about Chapter 13

Although 3 to 5 years may sound like a long time, the length can actually be a big advantage. You have more time to catch up on or pay off debts that you either want to or must pay. So what seems like a disadvantage could actually be an advantage. 

There are lots of other misconceptions about how Chapter 13 works. That’s partly because it is such a flexible option. Chapter 13 cases can be very different from each another, with each addressing the unique circumstances of each person. So that leads to some confusion, as you hear about something in one case that may have little or nothing to do with how Chapter 13 would work for you.

One misconception is related to an objection often raised about Chapter 13: why pay my creditors all or part of what I owe them when I could just discharge those debts entirely in a Chapter 7 “straight bankruptcy” case?

Actually, often in Chapter 13 you pay some creditors nothing at all. Sometimes even all of your creditors receive nothing, expect those you want or need to pay.

A Standard Chapter 13 Case

In maybe the most standard kind of Chapter 13 case (if there is such a thing!), you pay certain special debts in full and you pay other more ordinary debts only a percentage of what you owe, and often only a small percentage. The special debts you pay are often those secured by collateral you want to keep. So you may be catching up on a home mortgage arrearage or “cramming down” a vehicle loan. Oher special debts are ones that can’t be discharged in Chapter 7. Examples include recent income tax debt or unpaid child or spousal support.

Then your remaining “disposable income” goes towards the rest of your debts. Usually you pay those “general unsecured” debts only whatever’s left over. If the special debts you are paying in full are relatively small and your “disposable income” left over each month is relatively large, you could pay a relatively high percentage of what you owe on the “general unsecured” debts. But more often you don’t have much money left over and so you end up paying just a drop in the bucket of what you owe on those debts.

Debts Paid Nothing

So how could you pay nothing at all on certain debts in a Chapter 13 case? Here are four circumstances that would happen:

  1. No money available for “general unsecured” debts because ALL of your “disposable income” is spent on your special debts.
  2. A creditor does not file a proof of claim on the debt, or does not do so on time. So you don’t pay anything on that debt.
  3. Your bankruptcy lawyer objects to a creditor’s proof of claim. Then the creditor either fails to respond on time or you prevail on that objection.
  4. At some point in your Chapter 13 case your circumstances significantly change. So your lawyer converts your case into a Chapter 7 one, discharging all or most of your debts in full.

We’ll cover each one of these in our next 4 blog posts. This will give you a better idea how Chapter 13 really works.

 

Debt Write-off under Chapter 13

December 16th, 2016 at 8:00 am

The discharge of debts is just one of the tools of Chapter 13 for achieving your financial goals.  It works differently than in Chapter 7. 

 

Our last blog post was about the permanent write-off—the “discharge”—of debts in a Chapter 7 “straight bankruptcy.” This discharge happens at the end of the case, which is usually only about 4 months after filing.

If you instead file a Chapter 13 “adjustment of debts” case, you also get a discharge of your debts. And it also happens at the end of your case. But with Chapter 13 that’s usually 3 to 5 years after its filing. A Chapter 13 discharge is different a number of ways.

1. Timing of Discharge

Let’s start with this long delay in the discharge.

When filing a Chapter 7 case you usually have two main goals:

  • Stop collection activity by your creditors—lawsuits, garnishments, foreclosure, and such.
  • Discharge those debts that can be discharged, and do so quickly.

Filing Chapter 13 stops creditor collection activity just as fast and as thoroughly as under Chapter 7. In fact, it’s often better because it’s more effective against certain kinds of debts—such as unpaid child/spousal support. There’s also a co-debtor stay—stopping collections against co-signers—available only under Chapter 13. And with debts that cannot be discharged—such as many tax debts—you can stop the collection actions for years, not just for a few months.

As for the long delay in getting the discharge, that’s usually not much of a practical problem because most of the creditors can’t do anything about it in the meantime. Their debts are stuck in limbo. Since your creditors can’t chase you in the meantime, what does it matter that the discharge doesn’t happen until your Chapter 13 plan has accomplished its objectives?

2. Conditioned on Successful Completion

One problem is that there’s no discharge of your debts at all unless you successfully complete your Chapter 13 case.

That’s also true in Chapter 7. But while it’s quite rare that a Chapter 7 case isn’t completed, it’s much more common with Chapter 13 cases. There’s just so much more that can go wrong in a Chapter 13 payment plan. And there’s so much more time for things to go sideways.

So as you consider filing a Chapter 13 case, know that you have to see it through to the end.

3. Discharge after Partial Payment of Debts

Under Chapter 7 most debts are either discharged completely or they are not discharged at all. Most debts are discharged completely. Certain exceptional ones, like recent income taxes and child/spousal support, are not. You may also voluntarily choose to exclude a debt or two from discharge to keep the collateral, such as with a vehicle loan.

In contrast, under Chapter 13 you must pay as much of your debts as you’re able over a 3-to-5-year period. This usually means you pay something on most or all of your debts. Then you get a discharge of the remaining portions at the end of your case.

But the portion of the debts that you pay during the case can be quite small. In many Chapter 13 cases most of the debtor’s disposable income would go towards special debts. The payment plans usually focus on dealing with secured and “priority” debts. You’re catching up on a major home mortgage arrearage or doing a “cramdown” on a vehicle loan. Or you’re getting current on back child support or paying a big chunk of income taxes. The rest of your debts only get what money is left over, which is often just a small percentage of what you owe. So at the end of the case you’re discharging most of what you owed on most of your debts.

Sometimes your payments plan dedicates ALL of your disposable income on special debts. So you pay nothing at all on the rest of your debts. These debts are just kept on hold during the course of your case, they receive nothing from you, and their entire balances are discharged at the end of the case.

4. “Super-Discharge”

Decades ago Chapter 13 used to discharge a number of categories of debts that Chapter 7 didn’t discharge at all.  Over the years Congress whittled away those Chapter 13 “super-discharge” powers.

Now there is only one primary one remaining—divorce property settlements and decrees. That’s the part of the divorce that divides up the marital assets and debts. So, your obligation to give your ex-spouse certain assets or to pay certain debts cannot be discharged under Chapter 7. But it can be in a Chapter 13 case.

Conclusion

Chapter 7 and Chapter 13 both end with a discharge of debts. But as you can see these discharges play out quite differently, reflecting the differences in these two bankruptcy options.

 

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 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.

 

Call today for a FREE Consultation

210-342-3400

Facebook Blog
Back to Top Back to Top