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Archive for the ‘median family income’ tag

Disadvantages of a Badly-Timed 5-Year Chapter 13 Case

December 31st, 2018 at 8:00 am

Following up on last week’s scenario, here are the financial, credit record, and other disadvantages of a forced 5-year Chapter 13 plan.   

 

Our last two blog posts were about how the last 6 calendar months of income of a person filing a Chapter 13 case can determine whether his or her Chapter 13 payment plan lasts only 3 years or instead a full 5 years. We showed how even relatively small shifts in income can cause this huge difference.

The last blog post gave a scenario illustrating how this would work in a real-life situation. It showed how under certain circumstances one person would have a 3-year payment plan if he or she filed a Chapter 13 case in January but a 5-year plan if filed in February.  Today we look at the financial and other consequences of this difference, and some other practical considerations.

Filing a Chapter 13 Case in January vs. February 2019

Our scenario involved a person receiving an extra $2,500 in income in January 2019 from a temporary holiday job. (That’s in addition to the $3,000 every month from the person’s regular job.) Because of the way income is calculated, that $2,500 would push this person over the median family income threshold, but only IF that income is counted. Filing the Chapter 13 case in January would result in that extra $2,500 NOT being counted. That’s because you count only the last 6 FULL CALENDAR MONTHS’ income (and double that for the annual amount). Those 6 months with a January filing are July through December 2018. You DON’T count the income of the month you’re filing the case—in this situation, January.

When filing the Chapter 13 case in February you DO COUNT the extra $2,500 in determining the plan’s length. That’s because the last 6 full calendar months are then August 2018 through January 2019, including the $2,500.

Financial Consequences

Our scenario assumed that your budget requires you to pay $300 per month into your Chapter 13 plan. If you have to pay that for 5 years instead of 3, that’s 2 more years of payments. 24 months of $300 payments totals $7,200. That’s a lot of extra money to pay just because you happened to file your Chapter 13 case in February instead of January.

That could potentially include filing the case just one day later—February 1 instead of January 31. Again, that’s because when filing on February 1 you must include January’s income—including the extra $2,500. When filing on January 31 you don’t include January’s income, avoiding that very troublesome $2,500.

Of course if your monthly Chapter 13 plan payment would be larger than $300, the extra money you pay will be that much more. For example, a $500 monthly plan payment would mean an extra $6,000 paid during the extra two years.

In addition, the longer your case lasts the more likely that your income would increase during your case. That may well require you to increase your monthly plan payment. That would result in you paying that much more during the final two years.

For example, assume you’re paying $500 per month into your payment plan from the beginning of your case. After 3 years you get a new job or a promotion increasing your income by $300 per month. If you had a 3-year plan (based on your initial income calculation) you’d be finishing your Chapter 13 case then. You’d pay nothing more into the payment plan; you’d get to keep all your income, including the pay increase.

Instead, if you’re in a 5-year plan you’d have two more years to go. You may well have to increase your $500 plan payments by $300 to $800 monthly. $800 per month for the final two years would mean an additional $19,200 paid to your creditors. And this could happen merely by filing your case with unwise timing!

Credit Record Consequences

These financial consequences of a longer case are bad enough. But the intangible consequences could be pretty bad as well.

Having your case last 2 years longer means 2 more years before you can really rebuild your credit. To some extent you may be able to build some positive credit history DURING a Chapter 13 case. That can happen if as part of the case you’re making regular contractual payments on your home or vehicle. But you’re still in the midst of a bankruptcy case, which harms your credit record. The sooner you complete your Chapter 13 case the better for credit purposes.

Two extra years in your case means that much longer before you’re free of the Chapter 13 trustee’s supervision. That likely means two more years that the trustee can take your income tax refunds to benefit your creditors. And, as described above, that’s two more years that increases in income could go, partly or fully, to your creditors.

Also, it’s 2 more years of the risk that you won’t finish your case successfully. To get some of the most important benefits of a Chapter 13 case you must complete it.  The longer a case lasts the more opportunities for things to happen that jeopardize a successful completion.

Lastly, being in a Chapter 13 case can be emotionally challenging. You wouldn’t be in it unless it was providing you significant financial benefits. (For example, saving your home and/or your vehicle(s), paying your income taxes or child support while protected from these creditors.) But you are in a sort of financial limbo. It feels very good to finish it and get it over with. You definitely want to do so in 3 years instead of 5 if you can.

 “Three-Year Plans” that Last Longer

One last thing: a Chapter 13 plan that is allowed to be finished in 3 years may last longer. Your income may allow you to have a 3-year plan but you can chose to have it last longer. The law provides that the bankruptcy “court, for cause,” may approve a length up to 5 years.

Many things that could push your allowed-to-be-3-year plan to be longer. You may want to pay for something—a home mortgage arrearage or priority income taxes, for example—and need more time to do so within a reasonable budget. So your plan may last up to 5 years in order for it to accomplish what you need it to.

IF this applies to you, being required to pay for 5 years because of your income may not be a practical disadvantage. On the other hand, you certainly don’t want to stumble into a 5-year Chapter 13 case simply because you didn’t time it well.

Talk with an experienced and conscientious bankruptcy lawyer to learn where your own unique circumstances puts you in all this.

 

Scenario: Filing Chapter 13 Now Shortens a Case by Two Years

December 24th, 2018 at 8:00 am

Here’s a scenario showing how the timing of your Chapter 13 filing can shorten your payment plan from 5 years to only 3. 

 

In our last blog post we explained how your last 6 calendar months of income can determine whether your Chapter 13 payment plan lasts 3 years or instead 5 years. We showed how even relatively small shifts in the money you receive can cause this huge difference.

How this can happen will make more sense after reading through the following scenario.

Our Facts about “Income”

Remember from last time that your “income” includes money from just about all sources, except Social Security. Also, the only money that counts is that which you received during the 6 FULL CALENDAR months before filing. This means that money received DURING the calendar month of filing DOESN’T count. For example, if you file your Chapter 13 case on January 31 you count the income from the previous July 1 through December 31. You don’t count any income received in January.

In our scenario assume you worked a second job during the holidays. Your monthly paycheck for December from this job is arriving on January 4, 2019. The anticipated gross income amount is $2,500. This money could also come from just about any other source. For example, your ex-spouse may be able to catching up on some unpaid child support owed because he/she received an annual bonus. It could be from just about any source. The point is that there’s an extra $2,500 arriving in early January.

In addition you receive $3,600 gross income every month from your regular job.

You received no money from any sources other than your regular job from July 1, 2018 through December 31, 2018. You expect to receive no money in January 2019 other than the $3,600 gross income and the additional $2,500.

So, assume that your bankruptcy lawyer files your Chapter 13 case between January 1 and January 31, 2019. The income that counts is what you received during the 6 prior full calendar months. That’s from July 1 through December 31, 2018. That is $3,600 per month times 6 months, or $21,600, or $43,200 for the annualized amount.

Our Facts about “Median Family Income”

Your income, as just discussed, determines whether your minimum payment plan length is 3 vs. 5 years. If your income is less than the designated “median family income,” your minimum plan length is 3 years. If your income is the same as or more than “median family income,” your minimum plan length is 5 years. Section 1322(d) of the U.S. Bankruptcy Code.

The “median family income” amounts (Section 39A of the Bankruptcy Code) come from the U.S. Census Bureau. This source data is adjusted annually, and is also adjusted more often to reflect changes in the Consumer Price Index. (The CPI comes from the U.S. Bureau of Labor Statistics.) The U.S. Trustee conveniently gathers this information at this webpage. From there the most recent median family income amounts (as of this writing) are compiled in this table.

For our scenario assume that you are single and live in Kentucky. According to the above table the median family income for a single person in Kentucky is $44,552. (You can find your own median family income by finding your state and family size in the table.)

Filing a Chapter 13 Case in January 2019

Under the facts outlined above, if you filed a Chapter 13 case during January 2019, your case could last 2 years less than if you filed the case in February, conceivably just a few days later.

Why? Because if you file in January you don’t count the income from that month. That means that you don’t count the $2,500 in income from the holiday job. You only count the $3,600 per month you received July through December from your regular job. As calculated above, that means an annualized income of $43,200. That is less than the applicable median family income amount of $44,552. So you’d be allowed to have a Chapter 13 payment plan that lasts only 3 years, and not be required to pay for 5 years.

Filing a Chapter 13 Case after January 2019

But if you file in February 2019 (or any of the following 5 months) your Chapter 13 plan would be required to last 5 years.

Why? Because if you file in February (or during the next 5 months) you do count the income from that month. That includes the $2,500 in income from the holiday job. When filing in February, for example, you count the income from August 1, 2018 through January 31, 2019. That includes the $3,600 per month from your regular job, plus the $2,500 from the holiday job. Six times $3,600 is $21,600, plus $2,500 equals $24,100. Multiply this by 2 gives you an annualized income of $48,200.

That is more than the applicable median family income amount of $44,552. So you’d be required to pay into your Chapter 13 plan for a full 5 years.

Next week we’ll discuss the financial and other consequences of this, and some other very important considerations.


Filing Chapter 13 in December (or January!) May Greatly Shorten Your Case

December 17th, 2018 at 8:00 am

Do you need a Chapter 13 case? WHEN you file it can mean the difference between a payment plan that takes 3 years and one that takes 5.  

 

In two blog posts last month (November 12 and 19) we showed how filing bankruptcy by the end of December 31 might allow you to file a Chapter 7 “straight bankruptcy” case instead of being forced into a Chapter 13 “adjustment of debts” one. You could have your debts discharged (legally written off) within just 3 or 4 months under Chapter 7. Otherwise you may have to go through a 3-to-5-year payment plan under Chapter 13. Besides likely costing much more, you’d only discharge your remaining debts if you successfully completed your payment plan.

But What If You Need a Chapter 13 Case?

The benefits of Chapter 7 won’t matter much to you if you need a Chapter 13 case in the first place.

Yes, Chapter 13 takes so much longer than Chapter 7.

And Chapter 13 is much riskier. Most Chapter 7 cases—especially one in which the debtor has a bankruptcy lawyer—get completed successfully. Chapter 13 comes with longer odds. A lot can happen in the 3 to 5 years that they usually take. Chapter 13 is a flexible tool, one that you can often adjust to changing circumstances. But the truth is that a significant percentage of them do NOT get completed successfully.

Notwithstanding the extra time and risks, Chapter 13 could still be by far the best tool for you.  That’s simply because it can accomplish many things that Chapter 7 can’t. For example, Chapter 13 can:

  • give you time to catch up on home mortgage and/or property taxes
  • buy you time and save you money if you owe lots of income taxes, especially if you owe on more than one tax year
  • give you time to catch up on child or spousal support while protecting your income, assets, and license(s) from suspension while doing so
  • allow you to keep assets that are otherwise not protected in a Chapter 7 case
  • lower your monthly vehicle payments and reduce the total amount on the loan
  • hold off on student loan payments and collection until you qualify for an “undue hardship”

And these are just some of the ways that Chapter 13 can deal with your creditors more powerfully than Chapter 7.

A Shorter Chapter 13 Payment Plan

So, what if you’ve learned that you really need a Chapter 13 case? What if you also learned that filing your Chapter 13 case in December instead of January would allow you to finish your case in 3 years instead of 5 years? Or what if that was true if you filed your case in January instead of February?

Paying into a Chapter 13 payment plan for 2 years less could save you many thousands of dollars. Plus, that would get you out of bankruptcy 2 years sooner. You’d be that much ahead of the game in rebuilding your credit.  You’d have the emotional relief of finishing and getting on with life sooner

Here could filing a Chapter case a month sooner shorten the case so much? Here’s how.

Your Last-6-Full Months of Income Determines How Long Your Chapter 13 Lasts  

Our blog post of November 12 described an unusual way of calculating your income for the Chapter 7 “means test.” (That’s a test to qualify for filing a Chapter 7 case.)   That way of calculating income also determines whether your Chapter 13 plan lasts a minimum of 3 years or 5.

Income is calculated as follows:

1) Consider almost all sources of money coming to you in just about any form as income…. .  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.

The 6-month amount is multiplied by 2 for the annual “income” total to be compared to the “median income” for your state and family size.

When you combine the above two considerations, monthly changes in your “income” can make a big difference.  That’s especially true if your money coming in is more than usual in either December or January.  (That would most often be from more overtime, a seasonal job, a monetary gift from family, and/or an employer’s bonus.)

Because of the way “income” is calculated there’s a higher risk that it would be larger than the “median income” for your state and family size. If it is larger, then you must pay your Chapter 13 case for 5 years instead of 3 years.

What’s My Applicable “Median income”?

The “median income” amounts are adjusted regularly and published by the U.S. Trustee Program of the Department of Justice. Here’s a table showing the “median family income” amounts for cases filed on or after November 1, 2018. It shows the amount for each state, by family size. (The amounts are adjusted about three times a year; see this webpage to see if there has been an update.)

(For the actual steps used in this calculation, see the official form, Chapter 13 Statement of Your Current Monthly Income and Calculation of Commitment Period.)

So if your “income” as calculated above is larger than your applicable “median family income” than your Chapter 13 case gets pushed to 5 years.  If it’s smaller, your case can last as short as 3 years. (That 3 or 5 years is the “commitment period” referred to in the official form in the paragraph above.)

If your “income” is larger because of unusual money you received in December and/or January, it may make sense to file your Chapter 13 case in either December or January so that the income of that month would not count. (Remember, that’s because you only count income of the PRIOR 6 FULL calendar months before the filing date.)

In next week’s blog post we’ll put all this into an example to make better sense of it 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.  

 

Timing Can Be Crucial for Passing the Means Test

July 10th, 2017 at 7:00 am

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

Passing the Means Test

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

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

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

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

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

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

An Example

Assume the following facts:

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

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

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

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

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

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

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

 

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

March 28th, 2016 at 7:00 am

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

 

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

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

The Easiest Way to Pass the “Means Test”

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

The Larger the Family the Larger the Median Family Income

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

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

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

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

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

When Your Family Size is Unclear

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

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

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

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

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

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

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

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

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

To be a “qualifying child”:

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

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

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

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

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

To be a “qualifying relative”:

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

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

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

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

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

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

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

 

What Is Your State for the “Means Test”?

March 25th, 2016 at 7:00 am

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

 

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

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

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

Different State Median Family Income Amounts Can Vary Significantly

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

The Bankruptcy Code Doesn’t Say

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

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

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

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

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

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

The “State in Which You Live”

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

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

What This Means in Practice

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

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

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

 

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

March 23rd, 2016 at 7:00 am

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

 

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

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

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

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

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

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

The “Income” Time Period

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

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

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

What’s Included in and Excluded from “Income”

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

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

Section 101(10A) of the Bankruptcy Code.

This may include income and payments from some unexpected sources.

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

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

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

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

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

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

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

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

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

Then What?

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

New Questions

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

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

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

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

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

 

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

March 21st, 2016 at 7:00 am

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

 

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

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

The Median Family Income Amounts Matter Because… ?

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

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

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

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

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

The April 1, 2016 Increases

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

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

STATE

1 EARNER

1 EARNER

 

11/1/15-3/31/16

STARTING 4/1/16

Indiana

$43,422

$43,474

Kentucky

$41,333

$41,382

Montana

$41,692

$41,741

Oregon

$47,809

$47,864

Texas

$44,178

$44,230

Utah

$54,250

$54,314

W. Virg.

$43,054

$43,105

Wisconsin

$44,764

$44,817

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

STATE

FAMILY OF 4

FAMILY OF 4

 

11/1/15-3/31/16

STARTING 4/1/16

Indiana

$74,584

$74,673

Kentucky

$69,593

$69,676

Montana

$71,261

$71,346

Oregon

$76,240

$76,330

Texas

$72,612

$72,698

Utah

$75,687

$75,777

W. Virg.

$67,036

$67,116

Wisconsin

$85,859

$85,961

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

 

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