Posted by Kevin on July 29, 2020 under Bankruptcy Blog | 
In the last blog, we discussed the advantages of paying priority debts through a Chapter 13 “adjustment of debts” case. We referred to recent income taxes as one of the most important kinds of priority debt. Today we show how Chapter 13 can greatly help you take care of recent income tax debts.
Recent Income Taxes Can’t Be Discharged
The law treats some, usually more recent, income tax debts very differently than other, usually older, income tax debts. Generally, new income taxes are “priority” debts and can’t be discharged (written off) in bankruptcy.
There are two major conditions determining whether a tax debt can be discharged. (There are other conditions but they are not very common so we don’t address them here.) Bankruptcy does NOT discharge an income tax debt:
1. if the tax return for that tax debt was legally due less than 3 years before you file your bankruptcy case (after adding the time for any tax return-filing extensions) U.S. Bankruptcy Code Section 507(a)(8)(A)(i).
OR
2. if you actually submitted the tax return to the IRS/state less than 2 years before you file the bankruptcy case. Bankruptcy Code Section 523(a)(1)(B)(ii).
Two Examples
Assume you filed a bankruptcy case on December 10, 2019. You owe income taxes for the 2017 tax year. The tax return for that tax was due on April 17, 2018 (because of a weekend and holiday). (This assumes no tax return filing extension.) That’s much less than 3 years before the December 1, 2019 bankruptcy filing date. So, no discharge of the 2017 tax debt, because of the first 3-year condition above.
As for the second condition above, assume again that you filed your bankruptcy case on December 10, 2019. This time change the facts so that you submitted the tax return late for the 2015 taxes, on October 1, 2018. That’s less than two years before the December 10, 2019 bankruptcy filing date. So because of the second condition above, taxes due for 2015 would not get discharged in bankruptcy
Meeting either of the two conditions makes the tax debt not dischargeable. In the second example immediately above, more than 3 years had passed since the deadline to submit the tax return. (The 2015 tax return was due on or about April 15, 2016.) But less than two years had passed since the actual submission of the tax return. So, no discharge of the tax debt.
With no discharge, you would have to pay that income tax debt after finishing a Chapter 7 case. But there are advantages of paying this priority debt in a Chapter 13 case.
Advantages of Paying Priority Income Tax Debts in Chapter 13
Under Chapter 13:
- You are protected from aggressive collection by the IRS/state not for 3-4 months as in Chapter 7 but rather 3-5 years.
- This includes preventing any new recorded tax liens, and getting out of any installment payment plans.
- The amount you pay monthly to all your creditors, including the priority tax, is based on your actual budget. It’s not based on often arbitrary requirements of the IRS/state.
- The amount your priority tax gets paid each month (if any) among your other debts is flexible. You do have to pay all of the priority tax debt(s) by the time you finish your Chapter 13 case. That’s up to a maximum 5 years. But other more urgent debts (such as catching up on a home mortgage) can often get paid ahead of the taxes.
- Usually you don’t pay any ongoing interest or penalties on the tax during the Chapter 13 case. That takes away the need to pay it quickly. Plus the lack of additional interest and penalties significantly reduces the amount needed to pay off the tax debt.
- If the IRS/state recorded a tax lien against your home or other assets before you filed bankruptcy, Chapter 13 provides a very efficient and favorable forum to value and pay off that secured portion of the priority debt.
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 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.
Posted by Kevin on February 18, 2018 under Bankruptcy Blog |
If your income is lower than the median income for your household size within your State, there is a “no presumption of abuse” and you can, almost always, file under Chapter 7. If, however, your income is higher than “median income,” you may still file a Chapter 7 case by going through the expenses step of the Means Test.
The concept behind the Means Test is pretty straightforward: people who have the means to pay a meaningful amount to their creditors over a reasonable period of time should be required to do so. That means they must file under Chapter 13 where payments are made to creditors over a 3-5 year period.
But putting that concept into law resulted in an amazingly complicated set of rules.
One of the complications is that the allowed expenses include some based on your stated actual expense amounts, while others are based on standard amounts. The standard amounts are based on Internal Revenue Service tables of expenses, but some of those standards are national and some vary by state. There are even some expenses which are partly standard and partly actual (certain components of transportation expenses).
Disposable Income
If after subtracting all the allowed expenses from your “income” you have some money left over, whether you can be in Chapter 7 depends on the amount of that money and how that compares to the amount of your debts:
- If the amount left over—the “monthly disposable income”—is no more than $128.33, then you still pass the means test and qualify for Chapter 7.
- If your “monthly disposable income” is between $128.33 and $214.17, then apply the following formula: multiply that amount by 60, and compare that to the total amount of your regular (not “priority”) unsecured debts. If the multiplied total is less than 25% of those debts, then you still pass the means test and qualify for Chapter 7.
- If after applying the above formula you can pay 25% or more of those debts, OR if your “monthly disposable income” is more than $214.17, then you do NOT pass the means test, UNLESS you can show “special circumstances”.
THAT’s Complicated!
If you don’t pass the means test you, will likely end up in a 3-to-5-year Chapter 13 case. Not only will that mean you cannot discharge your debts until the end of the 3-5 year period, but you may well also end up paying thousands, or even tens of thousands, more dollars to your creditors. It’s definitely worth going through the effort to find a competent bankruptcy attorney to help you, whenever possible, find a way to pass the means test.
Posted by Kevin on July 25, 2017 under Bankruptcy Blog |
How can you tell if your Chapter 7 case will be straightforward? Avoid 4 problems.
Most Chapter 7 cases ARE straightforward. Your bankruptcy documents are prepared by your attorney and filed at court, about a month later you go to a simple 10-minute hearing with your attorney, and then two more months later your debts are discharged—written off. There’s a lot going on behind the scenes but that’s usually the gist of it.
But some cases ARE more complicated. How can you tell if your case will likely be straightforward or instead will be one of the relatively few more complicated ones?
The four main problem areas are: 1) income, 2) assets, 3) creditor challenges, and 4) trustee challenges.
1) Income
Most people filing under Chapter 7 have less income than the median income amounts for their state and family size. That enables them to easily pass the “means test.” But if instead you made or received too much money during the precise period of 6 full calendar months before your case is filed, you can be disqualified from Chapter 7. Or you may have to jump through some more complicated steps to establish that you are not “abusing” Chapter 7. Otherwise you could be forced into a 3-to-5 year Chapter 13 case or your case could be dismissed—thrown out of court. These results can sometimes be avoided with careful timing of your case, or even by making change to your income before filing.
2) Assets
Under Chapter 7 if you have an asset which is not protected (“exempt”), the Chapter 7 trustee can take and sell that asset, and pay the proceeds to the creditors. You may be willing to surrender a particular asset you don’t need in return for the discharge of your debts. That could especially be true if the trustee would use those proceeds in part to pay a debt that you want and need to be paid anyway, such as back payments of child support or income taxes. Or you may want to pay off the trustee through monthly payments in return for the privilege of keeping that asset. In these “asset” scenarios, there are complications not present in the more common “no asset” cases.
3) Creditor Challenges to the Dischargeability of a Debt
Creditors have a limited right to raise objections to the discharge of their individual debts. This is limited to grounds such as fraud, misrepresentation, theft, intentional injury to person or property, and similar bad acts. With most of these, the creditor must raise such objections to dischargeability within about three months of the filing of your Chapter 7 case—precisely 60 days after your “Meeting of Creditors.” Once that deadline passes your creditors can no longer complain, assuming that they received notice of your bankruptcy case.
4) Trustee Challenges to the Discharge of All Debts
In rare circumstances, such as if you do not disclose all your assets or fail to answer other questions accurately, either in writing or orally at the trustee’s Meeting of Creditors, or if you don’t cooperate with the trustee’s review of your financial circumstances, you could possibly lose the right to discharge any of your debts. The bankruptcy system largely relies on the honesty and accuracy of debtors. So it is quite harsh towards those who abuse the system through deceit.
No Surprises
Most of the time, Chapter 7s are straightforward. The most important thing you can do towards that end is to be completely honest and thorough with your attorney during your meetings and through the information and documents you provide. That way you will find out if there are likely to be any complications, and if so whether they can be avoided, or, if not, how they can be addressed in the best way possible.
Posted by Kevin on May 30, 2017 under Bankruptcy Blog |
Most people considering Chapter 7 “straight bankruptcy” have low enough income to qualify. Find out if you do.
The “Means” Part of the “Means Test”
When Congress passed the last major set of changes to the bankruptcy laws in 2005, it explicitly said that wanted to make it harder for some people to file Chapter 7. The idea was that those who have the means to pay a significant amount of their debts should do so. Specifically, those who can pay a certain amount to their creditors within a three-to-five-year Chapter 13 payment plan ought to do so, instead of just being able to write off all their debts in a Chapter 7 case.
How the Law Determines Whether You Have Too Much “Means”
The “means test” measures people’s “means” in a peculiar, two-part way, the first part based on income, the second part based on expenses.
The income part is relatively straightforward; the expense part involves an amazingly complicated formula of allowed expenses.
The good news is that if your income is low enough on the income part of the “means test,” then you’re done: you’ve passed the test and can skip the rest of the test. The other good news is that most people who want to file a Chapter 7 case DO have low enough income so that they do pass the “means test” based simply on their income.
Is YOUR Income Low Enough to Pass the “Means Test”?
Your income is low enough if it is no higher than the published “median income” for a household of your size in your state. You can look at your “median income” on https://www.justice.gov/ust/means-testing.
A Peculiar Definition of “Income”
Here’s what you need to know to compare your “income” (as used for this purpose) to the “median income” applicable to your state and family size:
1. Determine the exact amount of “income” you received during the SIX FULL calendar months before your bankruptcy case is filed. It’s easiest to explain this by example: if your Chapter 7 case is to be filed in July, 2017 , count every dollar you received during the six-month period from January 1,, 2017 through June 30, 2017. After coming up with that six-month total, divide it by six for the monthly average.
2.When adding up your “income” include all that you’ve acquired from all sources during that six-month period of time, including unconventional sources like child and spousal support payments, insurance settlements, unemployment benefits, and bonuses. But EXCLUDE any income from Social Security.
3. Multiply your six-month average monthly income by 12 for your annual income. Compare that amount to the published median income for your state and your size of family in the link provided above. (Make sure you’re using the current table.)
Conclusion
If your “income”—calculated in the precise way detailed here—is no more than the median income for your state and family size, then you have passed the “means test” and can file a Chapter 7 case.
But if your income is higher than that, you may still be able to pass the “means test” and file a Chapter 7 case. That is a little more complicated, however.
Posted by Kevin on October 24, 2013 under Bankruptcy Blog |
The amount of your income alone may not disqualify you from Chapter 7.
The last blog said that:
• You can avoid the “means test” altogether if more than half of your debts are business debts—they were NOT incurred “primarily for a personal, family, or household purpose.”
• When comparing your “income” for the “means test” against the applicable “median family income,” your “income” is based on virtually all the money you receive during the previous six-full-calendar-month period. Which six months make up that period depends when you file, meaning that you may have some control over your “income” and whether or not is it above the “median family income” amount.
• But even if your “income” is indeed higher than your applicable “median family income,” that’s just the beginning of the “means test.”
So here are the remaining steps of the “means test,” each step giving you another opportunity to pass it and qualify for Chapter 7. Be forewarned: these additional steps are not the easiest to understand:
• You can deduct certain living expenses from your monthly “income” to see if your “monthly disposable income” is low enough. Unfortunately, the rules for determining what expenses you may deduct and how much for each are almost unbelievably complicated. It would take pages and pages to explain. For just a taste of this, the allowed amounts for some types of expenses are based on what you actually spend, some are based on tables of local standards amounts, others on national standards. For our present purposes, what counts is that after applying those rules, if the amount left over—the “monthly disposable income”—is no more than $117, then you can still file Chapter 7.
• If your “monthly disposable income” after deducting expenses is between $117 and $195, then the following formula is applied. Multiply your “monthly disposable income” by 60. Then compare that amount to the total amount of your regular (non-priority) unsecured debts. If the multiplied amount is not enough to pay at least 25% of those debts, then you can file Chapter 7.
• If after applying the above formula you CAN pay at least 25% of those debts, OR if after deducting your allowed living expenses the resulting “monthly disposable income” is more than $195, then you can still file under Chapter 7 by showing “special circumstances.” Examples of appropriate “special circumstances” in the Bankruptcy Code are “a serious medical condition or a call or order to active duty in the Armed Forces.” So, be forewarned. Special circumstances is very limited in scope.
The previous blog showed that even the relatively simple first step of the “means test”—comparing your “income” to the “median family income”—has its unexpected twists and turns. Today we’ve seen that if your “income” is indeed too high for that first step, there are other steps to the “means test” which—although admittedly complex—which may get you successfully through Chapter 7.
On a practical level, the amendments to the Bankruptcy Code make filing bankruptcy more expensive for the debtor. Not only are there additional monies required for filing fees, courses and due diligence, there is substantial additional attorney time associated with filing even Chapter 7. Completing the means test and justifying the result to a trust is one of those areas.
Posted by on October 13, 2013 under Bankruptcy Blog |
Don’t get rushed into filing bankruptcy when the timing’s not right. Filing at the right time could save you thousands of dollars.
Timing Does Not Always Matter Much, But It CAN Be Huge
Many laws about bankruptcy are time-sensitive. And those time-sensitive laws involve the most important issues—what debts can be discharged (written off), what assets you can keep, how much you pay to certain creditors, and even whether you file a Chapter 7 case or a Chapter 13 one.
It is possible that the timing of your bankruptcy filing does not matter in your particular circumstances. But given how many of the laws are affected by timing, that’s not very likely. It’s wiser to give yourself some flexibility about when your case will be filed. If you wait until you’ve lost that flexibility—because you have to stop a creditor’s garnishment or foreclosure—you could lose out on some significant advantages.
Today’s blog post covers the first one of those potential timing advantages.
Being Able to Choose between Chapter 7 and Chapter 13
Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” are two very different methods of solving your debt problems. There are dozens and dozens of differences. You want to be able to choose between them based on what’s best for you, not because of some chance timing event.
To be able to file a Chapter 7 requires you to pass the “means test.” This test largely turns on your income. If you have too much income—more than the published median income for your family size and state—you can be disqualified from doing the get-a-fresh-start-in-four-months Chapter 7 option and be forced instead into the pay-all-you-can-afford-for-three-to-five-years Chapter 13 one.
The “Means Test” Income Calculation
What’s critical here is that income for purposes of the means test has a very special, timing-based definition. It is money that you received from virtually all sources—not just from employment or operating a business—during the six full calendar months before your case is filed, and then doubling it to come up with an annual income amount. For example, if your bankruptcy case is filed on September 30 of this year, what is considered income for this purpose is money from all sources you received precisely from March 1 through August 31 of this year. Note that if you waited to file just one day later, on October 1, then the period of pertinent income shifts a month later to April 1 through September 30.
So if you received an unusual chunk of money on March 15, that would be counted in the means test calculations if you filed anytime in September, but not if you filed anytime in October. If that chunk of money pushed you over your applicable median income amount, you may be forced to file a Chapter 13 case if your bankruptcy case is filed in September. But not if you filed in October because that particular chunk of money arrived in the month before the 6-month income period applicable if you waited to file until October.
Conclusion
Being able to delay filing your bankruptcy in this situation—here literally by one day from September 30 to October 1—allows you to pass the means test and therefore very likely not be forced to file a Chapter 13 case. Being in a Chapter 13 case when it doesn’t benefit you otherwise would cost you many thousands of dollars in “plan” payments made over the course of the required three to five years. Clearly, filing your case at the tactically most opportune time can be critical.
The sooner you meet with a competent attorney who can figure out these and similar kinds of considerations, the sooner you will become aware of them and the more likely problems like the one outlined here can be avoided.
Posted by Kevin on July 10, 2013 under Bankruptcy Blog |
Bankruptcy quashes a garnishment, but only if it’s filed in time.
It’s all about federalism. OK. Take a deep breath. This is a little technical, but we can get through it.
Under our federalist system of government, first, federal law trumps state law in those areas of law—such as bankruptcy—in which the U.S. Constitution gives Congress the power to write laws. But second, federal law respects state law in areas of law where the states have the right to make laws—about the collection of debts, for instance.
So, state garnishment law and federal bankruptcy law butt up against each other when a garnishment and bankruptcy filing happen at about the same time.
Bankruptcy stops virtually all garnishments once the bankruptcy case is filed. But this power of bankruptcy—called the automatic stay—only kicks in at the moment of filing, not before that. So if a garnishment order is entered by the state court and your employer delivers money over to the garnishing creditor the minute before the bankruptcy case is filed, the garnishment is not prevented by the automatic stay. But the automatic stay stops all future garnishments, because now the federal law is trumping state court in the area of law where it reigns supreme.
So it’s a race between a creditor completing a garnishment in the state court, and you filing a bankruptcy in bankruptcy court.
Close Calls Depend on the Details of State Garnishment Procedures
More about the automatic stay.
Bankruptcy law simply says that a bankruptcy filing “operates as a stay” (a “freezing”) of “the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the [bankruptcy] case.” A garnishment is an “enforcement… of a judgment obtained before” the bankruptcy case was filed. “Property of the estate” consists of everything that you own at the time your bankruptcy is filed, including a paycheck that’s been earned but not yet paid to you.
So the creditor is stopped from garnishing from that paycheck, UNLESS according to that state’s laws at the moment of the bankruptcy filing the garnished money no longer belongs to you, and thus, not to your new “bankruptcy estate.” Exactly when that happens depends on that state’s exact garnishment procedure and on its property law. For example, who does the money being garnished belong to—you or the creditor—if the employer has cut the check for the creditor but not yet delivered it to the creditor at the moment the bankruptcy is filed. You get the idea how complicated this can get.
The Main Idea
Regardless how these hair-splitting issues would be resolved in your state, the main lesson here is to avoid this problem by having your bankruptcy case be filed well before a creditor has the right to garnish your wages. Yes, in the real world that may be harder said than done, but you can see why it makes sense.
In the next blog, we will re-visit this issue
Posted by Kevin on May 14, 2013 under Bankruptcy Blog |
If your family income is more than the “median family income,” you may still be able to file under Chapter 7.
The “median family income” within a particular state is the dollar amount at which half of the families in that state make less, and half make more than that amount. “Median family income” amounts are calculated for different size families within each state. This information, which originates from the U.S. Census, is available on a table downloadable at the U.S. Trustee’s website. Make sure you’re looking at the most recent table.
Let’s be clear: if your income is at or less than the “median family income” for your size family, in your state, then you are eligible to file under Chapter 7. (Other separate hurdles may need to be addressed but those go beyond today’s blog.)
It only gets complicated if your income is more than the applicable “median family income.” As stated in the very first sentence above, you still may be able to file a Chapter 7 case. Here what you need to know to help make sense of this:
A. Simply figuring out your own family income to find out if you are above or below the “median family income” is much harder than you’d think. It’s not last year’s gross taxable income, or anything commonsensical like that. It’s instead based on a much broader understanding of income—basically every dollar that comes to you from all sources, with some very limited exceptions. And it’s based only on the income received during the last 6 full calendar months before filing, and then converting that into an annual amount. And that’s the easy part!
B. If your family income is higher than the applicable “median family income,” then you still have a number of ways that you can file a Chapter 7 case:
1.Deduct your living expenses from your monthly income to see if your “monthly disposable income” is low enough. The problem is that figuring out what expenses are allowed to be deducted involves understanding a tremendously unclear and complicated set of rules. In any event, after your attorney applies those rules, if the amount left over—the “monthly disposable income”—is no more than $117, then it is low enough so that you can still file Chapter 7.
2. If after deducting your allowed living expenses, your “monthly disposable income” is more than $195, then you can’t file under Chapter 7, except by showing “special circumstances.”
3. And what happens if your “monthly disposable income” is between $117 and $195? That’s where the real fun begins. Multiply your specific “monthly disposable income” by 60. Compare that amount to the total amount of your regular (non-priority) unsecured debts. If the multiplied amount is not enough to pay at least 25% of those debts, then you can file Chapter 7.
So to go back to the question in the title of this blog, you can see that even if your income is higher than your state and family size’s “median family income,” you can still file Chapter 7 under a number of different financial conditions. You can also see that the law is convoluted. This is definitely an area where you need to get solid legal advice.
Posted by Kevin on May 5, 2013 under Bankruptcy Blog |
If your financial life is legally simple, your bankruptcy will likely be simple. What is it about your financial life that makes for a not so simple bankruptcy case?
Bankruptcy can be very flexible. If your finances are complicated, bankruptcy likely has a decent way to deal with all the messes. As in life, sometimes there are trade-offs and important choices to be made. But usually, whether your life is straightforward or complex, bankruptcy can adjust.
To demonstrate this in a practical way, here are some differences between a simple and not so simple bankruptcy case.
1. No non-exempt assets vs. owning non-exempt assets: In the vast majority of Chapter 7 and Chapter 13 cases, you get to keep everything that you own. But even if you do own assets that are not protected (“non-exempt”), there are usually decent ways of holding on to them even within Chapter 7, and if necessary by filing a Chapter 13 to do so.
2. Under median income vs. over median income: If your income is below a certain amount for your state and family size, you have the freedom to file either Chapter 7 or 13. But even if you are above that amount, you still may be able to file under either Chapter, depending on a series of other calculations. Again, Chapter 13 is there if necessary, and sometimes that may be the better choice anyway.
3. Not behind on real estate mortgage vs. you are behind: If you don’t have a home mortgage or are current on it, that makes for a simpler case. But bankruptcy has many ways to help you save your house. Sometimes that can be done through Chapter 7, although Chapter 13 has a whole chest full of good tools if Chapter 7 doesn’t help you enough.
4. No debts with collateral vs. have such debts: The utterly simplest cases have no secured debts, that is, those with collateral that the creditor has rights to. But most people have some secured debt. Both Chapter 7 and 13 have various ways to help you with these debts, whether you want to surrender the collateral or instead need to keep it.
5. No income tax debt/student loans/child or spousal support arrearage vs. have these debts: Bankruptcy treats certain special kinds of debts in ways that are more favorable for those creditors, so life is easier in bankruptcy if you don’t have any of them. But if you do, you might be surprised how sometimes you have more power over these otherwise favored creditors than you think. You can write off or at least reduce some taxes in either Chapter 7 or 13, stop collections for back support through Chapter 13, and in certain circumstances gain some temporary or permanent advantages over student loans.
6. No challenge expected by a creditor to the discharge of its debt vs. expecting a challenge: In most cases, no creditors raise challenges to your ability to write off their debts. Even when they threaten to do so, they often don’t within the short timeframe they must do so. But if a creditor does raise a challenge, bankruptcy procedures can resolve these kinds of disputes relatively efficiently.
7. Never filed bankruptcy vs. filed prior bankruptcy: Actually, if you filed a prior bankruptcy, or even more than one, it may well make no difference whatsoever. But depending on the exact timing, a prior bankruptcy filing can not only limit which Chapter you can file under, it can even sometimes affect how much protection you get from your creditors under your new case.
We’ll dig into some of these differences in upcoming blogs. In the meantime remember that even though your financial life may seem messy in a bunch of ways, there’s a good chance that bankruptcy can clean it up and tie up those loose ends. It’s called a fresh start.
Posted by Kevin on September 10, 2012 under Bankruptcy Blog |
Bankruptcy protects your paycheck because it’s more powerful than a creditor’s garnishment court order
A garnishment is effectively a court order which tells your employer to pay a portion of your paycheck to the creditor instead of to you. Except in rare circumstances, a creditor can’t get that garnishment order without first suing you and getting a judgment saying that you owe the debt. A judgment is the court’s decision that you do indeed owe the debt, how much you owe, and the amount of any additional costs. A judgment authorizes a creditor to use a variety of powerful ways to get money or property out of you to pay the debt, often (but not always) including through wage garnishment.
Bankruptcy stops wage garnishments at four stages of the process:
- before the creditor files a lawsuit, by stopping that lawsuit from being filed in the first place
- very shortly after a lawsuit is filed, by preventing that lawsuit from turning into a judgment
- after a judgment is entered, by not allowing the creditor to get a garnishment order
- after a garnishment order is signed by the court where the judgment was entered, by trumping the garnishment court order with a more powerful bankruptcy “automatic stay”
So your bankruptcy prevents most garnishments from happening. It stops future hits on your paycheck from a “continuous garnishment,” in which there is one garnishment order requiring money to be taken out of your paycheck until the debt is paid. And it also stops new garnishments on an old judgment, for example, when a creditor finds out about your new employer.
Bankruptcy Stops Some Wage Garnishments Only Temporarily
In preventing upcoming wage garnishments, bankruptcy USUALLY does so permanently. This happens when a debt is discharged (legally written off) in the bankruptcy case, as most debts are. Once a debt is discharged, under Section 524(a)(2) of the Bankruptcy Code an injunction is imposed against the collection of that debt every again, by any means including garnishment. So in those situations the bankruptcy filing stops the garnishment, forever.
So when are garnishments NOT stopped permanently? Garnishments are just temporarily stopped by your bankruptcy filing if the debt is NOT being discharged in the Chapter 7 case—such as certain taxes, most student loans, and a few other kinds of debts. The automatic stay preventing the garnishment is in effect only from the time the case is filed until the entry of the discharge about three months later. So, for example, if the IRS was garnishing your wages before the filing of your bankruptcy to collect on a tax that is not being discharged, the IRS can resume doing so after the discharge is entered (unless in the meantime arrangements are made with the IRS to make monthly payments on that debt, which hopefully you would be able to do after the discharge of your other debts).
Bankruptcy Does Not at All Stop A Few Rare Kinds of Wage Garnishments
If you are filing a Chapter 7 case, the automatic stay does not protect you from wage garnishment to pay child and spousal support obligations, for either current or back support. This means that an ongoing garnishment for support will not be stopped by a bankruptcy filing. And if there had been no garnishment earlier, those garnishments could actually start during your bankruptcy case.
Fortunately, Chapter 13 DOES stop garnishments for support, and provides a way to catch up on back support while under the protection of the bankruptcy court.
Present and Past Wage Garnishments
We’ve covered the effect of bankruptcy on future garnishments, including those that would have gone into effect right after the bankruptcy filing. But what about garnishment orders that go into effect just before filing bankruptcy? For example, what if you’re racing to file bankruptcy after a judgment is entered, but your bankruptcy is filed and the automatic stay goes into effect a day or two after the garnishment order is signed but before any money comes out of your paycheck? And how about after the money has been paid by your employer to the creditor, days or even weeks before your bankruptcy filing? Under what circumstance could you possibly get that money back? The next two blogs will get into these questions about present and past garnishments.
Posted by Kevin on June 8, 2012 under Bankruptcy Blog |
What does it take to write-off a student loan in bankruptcy? An “undue hardship.” And that is a very tough standard to meet.
When the 1978 Code was enacted, you could discharge a student loan 5 years after the first payment was due or for undue hardship. By 1990, there was an outcry that the 5 year rule was too lenient. It was increased to 7 years. I remember that what would drive the judges crazy when, say, a medical student, usually during his or her residency, would file a Chapter 7 and wipe out $200,000 of student loan debt, and then afterward pull in the big bucks. Admittedly, this was egregious. By the mid-90’s, there was talk that the time period would be increased to 10 years. But Congress, through the Higher Education Amendments of 1998, decided to do away with the time element for discharge of student loans. The Bankruptcy Code incorporated this amendment. So, since 1998, undue hardship to the debtor and the debtor’s dependents is the only way to discharge a student loan.
Undue Hardship is not defined in the Code. That means that the bankruptcy courts were required to decide, on a case by case basis, what undue hardship means. There have been hundreds of decisions relating to what constitutes an undue hardship. Although there are some differences among regions of the country, the general consensus that to meet this “undue hardship” hurdle, you have to show that you meet three conditions:
1. Under your current income and expenses, if you were required to repay the student loan, you would be unable to maintain even a minimal standard of living.
2. This inability to maintain a minimal standard of living while repaying the student loan would likely stretch out over all or most of the loan repayment period.
3. You had made a meaningful effort at repaying the loan, or to qualify for appropriate forbearances, consolidations, and administrative payment-reduction programs.
The bottomline is that very few debtors will be able to get a student loan discharged. That means that even if you file bankruptcy, you will be required to pay off the student loan- no matter how long it takes. Moreover, unlike some debts in which the burden is on the creditor to challenge the discharge of the debt, with a student loan the burden is on the borrower to establish “undue hardship” during the bankruptcy case. Otherwise, no discharge and the debt survives your bankruptcy case. As we said in the opening- a very tough standard.
