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 December 10, 2018 under Bankruptcy Blog |
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.
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 can create 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.
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.
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. Think year end bonus. Remember, if you file bankruptcy in December, only money received June through November gets counted.
So let’s say you got an extra $1,500 as a bonus in December. If you file in December that extra doesn’t count. But if you wait until January to file, December money is counted because 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. Then, you may not qualify for Chapter 7.
Conclusion
It is a fact that most people wait way too long before their initial consultation with a bankruptcy lawyer. Our advice is to consult early so you can know your options and possibly formulate a strategy which can save you money over the long haul.
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 January 28, 2015 under Bankruptcy Blog |
Took a little break from blogging. But, now I am back. Eventually, I will be setting up a student loan website and blog. In the interim, I will be making comments about students loans in this bankruptcy blog.
I guess I am dating myself by the next comments. It is unbelievable what people are paying for college and grad school in the US. I went to Dartmouth College from 1969-1973. The first year was about $3000. The last year was about $3500. I had a 50% merit scholarship from my father’s union. He paid the rest out of his salary of about $18,000 (median income in US was $10,512). Mom, like most mom’s in those days, stayed at home. I provided my own spending money by loading trucks during summers and holidays. Forget about the scholarship. The basic nut at Dartmouth was about 17-19% of my father’s gross salary, and 31% of the median income. State colleges would have been less, say 15-20% of median income.
My youngest graduated college in January, 2013. His school, which was a private school, ran about $45,000 on the average. Not anywhere near the most expensive, but pricier than a State school. Median income for 2012 according to the US Census Bureau was $51,371. In other words, where my son went to school, the cost would be 88% of the median income in the US. If he went to a Rutgers, the estimated cost in 2012 was $26,627 or 52% of the median income.
See where we are going here. College costs are out of whack. What you get or don’t get for the money is another question.
Now, I am not an expert on FAFSA. I have read the material, and heard numerous lectures about how it supposed to work. Then, I had to fill it out for my kids. Then you get another picture.
It seems to me that if you earn under say $85,000, a good portion of your kid’s education will be covered by grants and school work programs. If you are over $100,000, however, you are pushed into the realm of student loans.
This is not a fun place to be. In future blogs, we will be going into the law and the practicalities of student loans. Today, I want to give a head’s up not the the parents and students who are already strapped with loans, but the parents and students who are facing the prospect of student loans.
The head’s up is to be pro-active in the process. At the minimum, read everything you can get your hands on. The past few days, I was reading about the dreaded NJ Class loans. These come from the State of New Jersey. Their reputation is that if you are in collection, it is not a walk in the park.
That being said, the website was helpful. Not only did they tell you what could be borrowed and the interest rate, there was a section called the Student Loan Game Plan. The game plan is to make sure that your loan payment is no more than 8-12% of the student’s starting salary. It gave good advice how to prepare for employment during your time at college. Moreover, it provided an extensive listing of occupations together with the average annual starting salary and the amount of student loan principal that could be supported by such an annual salary within the 8-12% guidelines. Finally, the Game Plan warns the parent and student to not over-borrow.
I advise parents to review this website. I am sure that other States have similar websites. Then, take the information to heart. If the State of NJ is telling you not to borrow more than 12% of your student’s intended income, then you better make sure that your kid’s financial aid package does not contain 35% of annual income in loans. Make the tough decisions upfront and avoid a world of pain down the line.
