Before You File a Chapter 7….
Now that we have a few month's worth of experience with the new law, I am getting a sense of what fact patterns are attracting the attention of the U.S. Trustee in Chapter 7 cases. If your situation fits one of these patterns, make sure to discuss same with your lawyer.
Fact pattern 1: debtor(s) whose gross income exceeds the median income. If you end up in a means test, you can be sure that the U.S. Trustee will look at your case. The trustee has bankruptcy analysts who plug all of the data from your filed Form 22A into a spreadsheet then they look at each category in an effort to find an expense allocation they can challenge. As one of the trial attorneys in the U.S. Trustee's office told me, the Trustee is trying to move more people into Chapter 13.
2. Fact pattern #2: Do you have a 401(k) loan in your means test calculations? If so, the U.S. Trustee does not consider this loan as a secured debt and they will object to any allocation for a 401(k) repayment in your means test. Presumably they would object to a 401(k) repayment in your Schedule J as well, as the Trustee contends that you are repaying yourself at the expense of creditors. Obviously be defaulting on a 401(k) loan you will lose part of your 401(k) and you will have tax issues. The Trustee takes the position that creditors should come before a 401(k) repayment. I am not aware of any Northern District Court rulings on this issue.
Fact pattern #3: Are you paying for a child's vehicle? In several of my cases, the U.S. Trustee has objected to this budget allocation both in the means test and on Schedule J. Their position is that creditors come before your child's car payment.
Fact pattern #4: Are you paying for your child's tuition and/or room and board at college. The Trustee's position is that these expenses are discretionary and should be counted toward "disposable income" available to fund a Chapter 13.
Fact pattern #5: Are you claiming the full permitted expense figures for budget allocations such as food, telephone, clothing, etc. If you claim the full figures for all of these categories, the Trustee might object and ask for documents to prove same. This issue – whether you are supposed to use the lower of your actual expenses vs. IRS standard expenses is undecided to my knowledge.
Fact pattern #6: Is your actual mortgage payment more than the IRS budget allocation for a family your size. Remember that Form 22A only allows you the IRS allocation. So, if your actual mortgage is $1,900 but the IRS gives you $1,500, the Trustee will conclude that you have $400 disposable.
Areas where there seems to be some wiggle room
1. Cell phones – the Trustee's attorney advised me that the Trustee has backed off objecting to cell phone and Internet allocations in most cases.
2. Bonuses that result in a median income over the State mean. If you can show that your bonus was a one time event, and preferably not likely to recur, the Trustee may not oppose your argument that the means test unfairly reveals disposable income. I suspect that the same would hold true if your median income calculation reflects a job that you no longer have.
[tags] Chapter 7 trustee, U.S. Trustee, United States Trustee, objections to Chapter 7, means test, median income test [/tags]
{ 15 comments… read them below or add one }
I am considering filing chaper 7 0r 13. I am not sure which one to file for. Some of the information is a little confusing to me. Cathy
I am considering chapter 7. My last 6 months income is less than the median income for my state (texas) BUT I had a one time distribution of a 401k (which was closed out and partly applied to my creditors). Will this inflate my numbers? Can this be removed from the “6 months test”?
I am considering chapter 7. I am not sure about the median income info because I am no longer employed and working a temp job and used my retirement to live on. My question has to do with income tax refund check. I don’t think I will be getting a refund this year because of my retirement penalty, but if I did get one would I have give to the bankruptcy courts because I filed bankruptcy?
Sheila
My husband passed away in Dec. ’07 and left no will. I got life insurance, but am using most of it to pay funeral expenses. I’m going to have to try chap. 7. Can’t I claim exempt on what’s left, if anything? I also have a loan from my daughter–should I pay that off (out of life insurance) before filing? On means test, if I have to use his income (since it’s not been 6 months since he died), do I use "2" as number in household (even though it’s "1" from now on)? Or should I just try to hold on until his income is well before the 6 months starts? Most of my debt is secured, so that means I won’t owe anything after they take it all and sell it, right?
I had intended to file under Chapter 7 in April. I received a partial distribution of approximately $25,000.00 as a result of an inheritance in February. This of course put me outside the means test. A second distribution is expect upon sale of the decedent’s home, possibly $20,00.00. I have talked to the probate attorney, the home is not yet listed and probably won’t be listed untilJuly or August. I will be eligible to file in September assuming the home doesn’t sell sooner which the attorney seems highly unlikely. I know I have to report the second distrubution from the estate but it shouldn’t effect my means test qualification. Can I argue the first distribution was “a one time event” and file sooner? I have creditors on my back and it won’t be long before they start seeking judgments. Thank you in advance for your reply.
Sincerely,
William McKeon
im owner of a small corporation,having to file chapter 7.can they take my house,which has a 30,000 dollar loan on it?
Gina, if the corporation files a Ch. 7, I don’t see how your personal assets would be affected. Obviously if there are personal guarantees involved that could be a problem. If you have not done so already, you really need to speak to a lawyer for legal advice specific to your situation. Good luck.
I am thinking of filling for bk just don’t know which one. I’m 20k in debt with no assets accept my truck (3K).I do how ever own a small business (sole proprietor)with a possibility of being sued. All depts are personal, and still need to continue doing buisness, thinking about incorporating with a partner.
Andy, I’m not so sure that I would want to file a bankruptcy to discharge only $20,000 of debt. Not that $20,000 of personal debt is insignificant, I just wonder if you are financially solvent enough to be self employed. In any case, I would discuss your situation with a bankruptcy lawyer for advice personal to your situation. Good luck to you.
Can I return my car after my chapter 7 is closed or do I have to do a motion to reopen the case
I have about 34k in bad debt in credit card and medical bills from my divorce in 2008. I have tried contacting a bk atty before and after the initial consult was completely ignored by them. on one of the issued involved a possible judgement where I was told they were just trying to get me to settle with them and they very well could not show up in to contest this. I have since been informed recently they have issued a judgement against me for about 21k and are going to garnish my check for this. Can I still look into filing bk or am I just out of luck? Between my new wife and I we do not pass the median income test and have to do the means test, this is where I left off with the previous atty. This is the second time an atty has blown me off when all I want is some understanding. Live in GA so the article helped and was hoping you may have some direction for me. Thanks.
My wife & I currently owe $13,000 in past rent , and our landlord is putting the pressure on to pay up but with no assets other than my 401k which cannot be cashed in unless I leave my company , what should we do ?
Pam, if you did not reaffirm the vehicle loan in the bankruptcy, you should be able to return the vehicle and have no liability. If you did reaffirm, you should check to see if you still have time to rescind the s reaffirmation. If you reaffirmed and the time to rescind has passed, I am not sure that reopening your Chapter 7 will do any good. Assuming you had an attorney assist you with your Chapter 7, I would talk to your lawyer as soon as you can.
John, I generally advise people against filing bankruptcy if their debt is less than $25,000 or more although you are legally allowed to take the bankruptcy route no matter what your debt. I also advise against cashing out a 401(k) early for any reason. In Georgia, where I practice, 401(k) funds are generally exempt assets which are protected from garnishment and protected assets in bankruptcy as well. This is a difficult situation because if you just move out, your landlord could sue you and then you’d face a potential wage garnishment. On the other hand, it does not appear that you can afford your current rent and going forward you are going to need to reduce your living expenses or generate more income. At this point I would suggest that you call a bankruptcy lawyer in your area – most will offer a free or low cost consultation. You may have to choose the least worst option and I think it would be wise to have an unbiased opinion about the risks and benefits of each possibility. Good luck.
Charlie, sometimes it takes a few calls to find a lawyer who will answer your questions. If you live in the northern part of Georgia, feel free to call my office at 770-393-4985 and ask to speak with Susan Blum.