Most of the clients who I represent in Chapter 7 or Chapter 13 cases view bankruptcy as their absolute last resort. Usually, by the time they get to me, these clients have exhausted every other alternative – they have borrowed money from relatives and friends, sold possessions on eBay and cashed out or borrowed against retirement plans.
All of these choices, by the way, create unintended consequences – if you are reaching that point of desperation where you are thinking about selling things, cashing out retirement plans, etc., I would rather that you call me before taking any action because of the risk that you might unknowingly lose some of the benefit from your bankruptcy filing, or possibly disqualify yourself altogether.
Retirement plan loans such as 401(k) loans create a variety of issues and are almost always a bad idea in a bankruptcy context. Presumably you borrow against your 401(k) because you need cash now, you expect to repay that loan in the near term, you want to preserve your 401(k) account for the future, and because you do not want the tax consequences associated with cashing out your 401(k).
Bankruptcy trustees, however, look at 401(k) loans in a different light. They see any allocation to repay a 401(k) loan (and sometimes any ongoing contribution to a 401(k) plan) as an unnecessary reduction of disposable income that would otherwise be available to pay creditors. 401(k) loan payments cannot be counted as allowable deductions in your means test calculations. And both Chapter 7 and Chapter 13 trustees and/or creditors will often object if you include a 401(k) loan repayment allocation in your Schedule I and J budget in either a Chapter 7 or Chapter 13.More on The Problem with 401(k) Loans and Consumer Bankruptcy
The United States Trustee has released revised median income figures for Georgia households. These new figures will apply to Chapter 7 and Chapter 13 cases filed after November 1. The revised figures continue the trend of lower household income amounts meaning that it will be more difficult to avoid a “presumption of abuse” in Chapter 7 filings. Presumably the new numbers reflect lower household income figures associated with the current recession.
The Bankruptcy Code looks to median household income figures compiled by the U.S. Census to determine whether or not you have the “means” or capacity to pay back some or all of your bills. Means testing was introduced into the consumer bankruptcy process in 2005.
The chart below summarizes the impact of the revised numbers:
| Family size | Median income thru Oct. 31 | Median income: after November 1 | Change |
| 1 | $40,546 | $38,748 | -$1,798 |
| 2 | $55,061 | $51,184 | -$3,877 |
| 3 | $60,887 | $55,767 | -$5,120 |
| 4 | $68,258 | $68,122 | -$136 |
The impact of this change is most pronounced on two person and three person families. Lower median income numbers mean that more filers will end up in Chapter 13 since anyone “above median” will be presumed to have enough money to pay back creditors in a Chapter 13. Chapter 13 cases filed using the new numbers will also result in higher monthly trustee payments because the amount of funds “available” to pay back creditors will be higher.
Above median debtors are not without hope – those filers can still qualify for Chapter 7 under part 2 of the means test, but that process puts more scrutiny on a filer’s budget and adds to the complexity of the filing. Read more about the forthcoming change to the median income tables on the Bankruptcy Law Network, where my colleague Jill Michaux has posted an article entitled “The Means Test Gets Meaner.”
Bottom line: if you are considering Chapter 7, look closely at that option prior to November 1, 2010 or risk an unpleasant post-Halloween surprise.
Filed under Means Test issues, Median income test issues by 
