Posted by Kevin on January 28, 2019 under Bankruptcy Blog | 
In a Chapter 7 bankruptcy, the debtor makes no payments and gets to keep her exempt assets. For a vast majority of debtors, this means they get to keep all their assets. The average Chapter 7 is completed in about 4 months
Creditors did not like this and lobbied for 20 years for a major overhaul of consumer bankruptcies. The result was the 2005 revisions to the Bankruptcy Code which was supposed to force more debtors to file under Chapter 13 where monthly payments of 36-60 months are required. This was accomplished by imposition of the “means test” -supposedly an objective way to decide who qualifies to file a Chapter 7 bankruptcy.
The “Objective” Rule
If you make under the median income for your State based on household size, you pretty much qualify for Chapter 7. If your income is above median, you must deduct from your income a combination of actual expenses and average local, State and national expenses to come up with your monthly disposable income.
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- If your monthly disposable income is less than $128.33, then you pass the means test and qualify for Chapter 7.
- If your monthly disposable income is between $128.33 and $214.17, then you go a step further: multiply that “disposable income” amount by 60, and compare that to the total amount of your regular (not “priority”) unsecured debts. If that multiplied disposable income” amount is less than 25% of those debts, then you still pass the “means test” and qualify for Chapter 7.
- If EITHER you can pay 25% or more of those debts, OR if your monthly disposable income is $214.17 or more, then you do NOT pass the means test. With rare exceptions, that means that you cannot file under Chapter 7.
There is not much difference between $128.33 per month and $214.17 per month- about $86 per month. Just enough for dinner for 2 at a decent restaurant. But at the low end, you can get through bankruptcy in 4 months and make no payments. At the high end, you make monthly payments for 3 to 5 years.
So where do these hugely important numbers come from? The Bankruptcy Code actually refers to those numbers multiplied by 60—$7,700 and $12,850. When the law was originally passed in 2005 these amounts were actually $6,000 and $10,000 (therefore, $100 and $167 monthly), but they have been adjusted for inflation since then.
So where did those original $6,000 and $10,000 amounts come from?
They are basically arbitrary. Maybe creditor lobbyists or congressional staffers floated the idea. Who knows? But, somewhere in the process Congress decided that it needed to use certain numbers, and those are the ones that made it into the legislation. It’s the law, regardless that there doesn’t seem to be any real principled reason for using those amounts.
The Bottom Line
Sensible or not, if your income is under the published median income amount, then you pass the “means test” and can proceed under Chapter 7. But if you are over the median income amount, then the amount of your monthly disposable income largely determines whether you are able to file a Chapter 7 case.
Posted by Kevin on January 21, 2019 under Bankruptcy Blog |
Say you owe $8000 on your 2018 federal taxes and have $18000 of credit card debt. If you file under Chapter 7, you should discharge the $18,000 credit card debt, but you will owe the IRS $8000- and they will come after you.
Chapter 13 can help.
Payment of 2018 Income Taxes in Chapter 13 Case
Chapter 13 is a very flexible procedure, especially appropriate for taking care of income tax debt. If you file in 2019, your plan will include taxes owed in 2018. In fact, that 2018 taxes (and any other years) income tax MUST be paid in full under the terms of your Chapter 13 plan. But the requirement that you pay that tax in full can be used to your advantage in a Chapter 13.
Basic Benefits
No matter what else is going on in your Chapter 13 case, you get three major benefits for paying your 2018 taxes through it.
1. The IRS (and any applicable state income tax agency) cannot harass you during the repayment process.
2. You have much more flexibility on the terms for paying the 2018 tax, including the ability to delay paying anything while focusing on even higher priorities (such as a home/vehicle/child support arrearage).
3. No additional interest or penalties are added while you are in the Chapter 13 case, so you will pay less while paying off the 2018 tax debt.
Paying Off Your 2018 Tax For Free
Sometimes the fact that you owe some recent income taxes can cost you absolutely nothing beyond what you would have had to pay anyway through your Chapter 13 case. How could this be?
The justification for this comes from the Chapter 13 requirement that you must pay all your “disposable income” into your plan each month during the required period of time. Usually that means that all your creditors are scheduled to receive a certain percent of the debt you owe them. However, priority creditors (including taxes) and secured creditors are paid first, and then whatever is left over is divided among the “general unsecured” creditors (credit cards).
An Example
Say you have disposable income of $300 per month, a 3 year plan and general unsecured debts of $18,000. You have to pay into the plan (assuming no trustee or attorney fees for the sake of simplicity), $10,800 (36 months times $300 per month) which would go to “general unsecured” debts.
But now assume that you have a 2018 income tax debt of $8,000. You would still pay $300 per month for 36 months, but now the $8,000 income tax would be paid out first, reducing the amount paid out to the “general unsecured” creditors. Those creditors would receive only $2,800 ($10,800 minus $8,000) out of the $18,000 owed to them, and you still get a discharge.
Since those 2018 taxes are not dischargeable, you, are, in effect, paying your taxes off the backs of your unsecured creditors. And you not only discharge your credit card debt but you paid your taxes in full. Not bad.
Posted by on January 13, 2019 under Bankruptcy Blog |
Because of how precisely the amount of your “income” is calculated, filing bankruptcy just a day or two later can make all the difference.
Passing the “Means Test”
“Income” for purposes of the Means Test includes income from any source except monies received under the Social Security Act. It includes income from irregular sources such as child and spousal support payments, insurance settlements, cash gifts from relatives, and unemployment benefits. Also, the Means Test is time-sensitive in that it is based on the amount of money received during precisely the 6 FULL CALENDAR months before the date of filing. This means that your “income” can shift by waiting just a month or two.
Why is the Definition of “Income” for the “Means Test” So Rigid?
One of the much-touted goals of the last major amendments to the bankruptcy law in 2005 was to prevent people from filing Chapter 7 who were considered not deserving. The most direct means to that end was to try to force more people to pay a portion of their debts through Chapter 13 “adjustment of debts” instead of writing them off Chapter 7 “straight bankruptcy.”
The primary tool intended to accomplish this is the “means test,” Its rationale was that instead of allowing judges to decide who was abusing the bankruptcy system, a rigid financial test would determine who had the “means” to pay a meaningful amount to their creditors in a Chapter 13 case, and therefore could not file a Chapter 7 case.
The Unintended Consequences of the “Means Test”
If your income is at or under the applicable median income, then you generally get to file a Chapter 7 case. If your income is higher than the median amount, you may still be able to file a Chapter 7 case but you have to jump through a whole bunch of extra hoops to do so. Having income below the median income amount makes qualifying for Chapter 7 much simpler and less risky.
Filing your case a day earlier or later can matter because of the means test’s fixation on the six prior full calendar months.
So if you receive some irregular chunk of money, it can push you over your applicable median income amount, and jeopardize your ability to qualify for Chapter 7.
An Example
It does not necessarily take a large irregular chunk of money to make this difference, especially if your income without that is already close to the median income amount. An income tax refund, some catch-up child support payments, or an insurance settlement or reimbursement could be enough.
Imagine having received $3,000 catch up support payment on July 15 of last year. Your only other income is from your job, where you make a $42,000 salary, or $3,500 gross per month. Let’s assume the median annual income for your state and family size is $45,000.
So imagine that now in January, 2019, your Chapter 7 bankruptcy paperwork is ready to file, and you would like to get it filed to get protection from your aggressive creditors. If your case is filed on or before January 31, then the last six full calendar month period would be July 1, 2018 through December 31, 2018. That period includes that $3,000 extra money you received in mid-July. Your work income of 6 times $3,500 equals $21,000, plus the extra $3,000 received, totals $24,000 received during that 6-month period. Multiply that by 2 for the annual amount—$48,000. Since that’s larger than the applicable $45,000 median income, you would have failed the income portion of the “means test.”
But if you just wait to file until February 1, then the applicable 6-month period jumps forward by one full month to the period from August 1 of last year through January 31 of this year. That new period no longer includes the $3,000 you received in mid-July. So your income during the 6-month period is $21,000, multiplied by 2 is $42,000. This results in your income being less than the $45,000 median income amount. You’ve now passed the “means test,” and qualified for Chapter 7.
