Evidence continues to mount that Chapter 7 will not be a friendly place for debtors who end up in the means test. As you know, you can only qualify for Chapter 7 if (1) their household income falls below the average income for a similarly sized family in your State, or (2) if your household income exceeds the average income, but you pass the "means test."
The means test sets out a budget using expense numbers that the IRS has deemed "reasonable." If your actual expense for a particular category exceeds the IRS number, too bad.
For example, if the IRS budget says that a family of 4 in Fulton County, Georgia may spend $1,529 for housing and utilities. If that family of 4 actually spends $2,000 for housing and utilities, they can only use the $1,529 in the housing/utilities column. For bankruptcy calculation purposes, this family has $471 "left over" and available to pay creditors in a Chapter 13.
Now, we learn that 401(k) loan repayments cannot be included in a means test budget. If you are paying back a 401(k) loan at $200 per month, for example, the Bankruptcy Court says that this $200 is actually "disposable" and available for creditors in a Chapter 13. The Court does not care that if you defaulted on a 401(k) loan you would face tax problems and possibly lose your retirement investment. Thanks to my colleague, attorney Bernd Stittleburg, who forwarded to me an email about the Lenton case from Pennsylvania and the Nockerts case from Wisconsin.
Bernd Stittleburg and I have both noticed that every Chapter 7 case that involves a means test inevitably results in an objection from the U.S. Trustee. I am therefore much less inclined to pursue Chapter 7 relief for a debtor whose income exceeds the means test numbers, and if I do take a "means test" case, I have no choice but to charge a substantially higher fee.
Congress created this means test to limit access to Chapter 7, and that goal is certainly being met. Unfortunately, honest but unfortunate debtors now have very little place to turn since bankruptcy relief is become less and less available.
Technorati Tags: means test, 401(k) loan repayment in bankruptcy, median income test, Bernd Stittleburg
Filed under Chapter 7 issues, Georgia Bankruptcy, Means Test issues, Median income test issues by 
With an increased emphasis in the new Bankruptcy Code upon a debtor’s income history, self-employed or commissioned sales debtors will find a hostile reception in Chapter 13. A recent case on which I have been working illustrates the problem.
My clients are self employed real estate agents, both in their 60′s. Residential real estate sales can be a good business, but it can also be cyclical – with some months yielding a nice income and other months completely dry. In this case my clients had close to $100,000 in credit card debt and close to $200,000 in income tax debt.
As an aside, real estate agents often have income tax problems because of the nature of their income. Funds are not always there when it comes time to pay quarterly estimates – the estimated payments are based on the previous year’s income. In addition, the sales cycle of listing to closing may be four to six months, which means that cash flow can be a problem.
In this particular case, we had to file earlier than I would have preferred because we were trying to beat the filing of a tax lien. Most of the tax debt in this case was "stale" for bankruptcy purposes, meaning that we could treat it as unsecured debt. Once a lien was filed, we would be stuck paying the entire amount as secured debt.
The problem we faced arose from my clients’ income in the six months prior to filing. The spring and summer months were realtively good for income purposes, resulting in an average monthly income that had no basis in current reality. This fall and winter had been very poor months for home sales, perhaps because of the rise in interest rates and tightening of mortgage underwriting standards.
When we ran a "means test," the calculations showed that my clients had close to $2,000 per month in disposable income. The problem – in November, my clients’ gross income was just short of $2,000.
I suggested that we consider a "step" plan that provided for a lower payment during "lean" months and a higher payment during spring and summer, which are traditionally better for real estate agents. At this point, my clients were wary about agreeing to this because of their concern that they could be digging a deeper hole for themselves.
We also discussed taking the case to the judge, but I really have no basis to argue that my clients’ income will not match that of 2005. I suspect that in this case, my clients are spending money for products and services that they are not completely documenting. I do not suspect any wrongdoing, but I do think that $20 here and $25 there are adding up, leaving them with no money at the end of the month.
We decided to leave the plan at the $2,000 per month figure for now. In six months, if the income situation has not improved, we will amend the plan and go for a reduction based on real life numbers. I have no doubt that this strategy will result in a great deal of hardship for my clients, but I don’t have any other ideas.
My conclusion – Chapter 13 has become even more unfriendly to self-employed and commision sales debtors.
Technorati Tags: Chapter 13, bankruptcy and commissioned sales debtor, real estate agents and bankruptcy, discharge tax in Chapter 13 bankruptcy, means test
Filed under Chapter 13 issues, Georgia Bankruptcy, Means Test issues, Tax issues by
Here is an issue about Chapter 13 calculations. I don't have the answer so I would appreciate any opinions, especially from any Chapter 13 trustee attorney who reads this blog.
The B22 Means Test looks to the debtor's average income calculated by looking at the debtor's income over the 6 month period preceding the month of filing. The B22 budget is a pro forma budget that uses IRS approved expense figures. We know that Judge Massey and Judge Mullins draw a distinction between the "projected disposable income" of a B22 form and actual disposable income that we see on the Schedule I & J budget. As I read their opinions, the actual budget as shown on Schedules I & J is the appropriate budget from which to evaluate whether a Chapter 13 should be confirmed.
Nevertheless, Chapter 13 trustees routinely file objections to confirmation on the grounds that the B22 showed X in disposable income and X x 60 months = Y which equals Z percentage dividend to unsecured creditors. If the plan as filed does not propose a payment of Z percent to unsecureds, the trustee objects.
In many of my Chapter 13 cases, the B22 does show disposable income, whereas the I & J schedules show none. Why? The allowable expenses per the IRS are incredibly stingy. For example, the IRS budget "allows" a Dekalb County family of 4 a whopping $1,176 for housing and utilities per month. If you assume that utilities are $250, that leaves $926 for a mortgage payment. That translates into roughly a $120,000 house.
Many honest, hardworking debtors live in $200,000 or $250,000 houses with mortgage payments - perhaps both a first and a second mortgage - of $1,800 to $2,000. Under the old law, this level of mortgage payment rarely if ever drew an objection.
Since the B22 Means Test in this example only recognizes the first $926 of our hypothetical $2,000 mortgage, the means test tells us that $1,074 is left over. At the same time, our debtors may have to stretch to find $200 or $250 in their Schedule I & J real life budget.
Nevertheless, the Chapter 13 trustees are using the $1,074 to determine what percentage the debtors need to be paying back to their unsecured creditors.
What is the basis of this objection? Does the Bankruptcy Code require a Chapter 13 debtor to pay a dividend to unsecureds equal to the B22 projected disposable income? If so, what the applicable Code section?
I have always taken the position that the B22 Means Test is a qualification – it tells you if you can file a Chapter 7 without a presumption of abuse, or a 36 month Chapter 13 or a 60 month Chapter 13. Beyond that, I don't see how any of the B22 numbers mean anything.
Is not Chapter 13 still controlled by the Kitchens criteria, where for years no one said "boo" abot a $2,000 mortgage obligation for a family of 4.
Thoughts? Comments?
Technorati Tags: means test, Schedule I & J, bankruptcy disposable income, projected disposable income
Filed under Chapter 13 issues, Georgia Bankruptcy, Means Test issues, Trustee objections in Chapter 13 by
Having run through several means test calculations over the past few days, it struck me that a lot of the misunderstanding about both the median income test as well as the means test arises from a fundamental misunderstanding in the press and the general public about what the results of a means test really signifies.
The means test, as you may know, involves the creation of a "budget" in which expense categories are limited to acceptable expense figures that are based on IRS derived numbers. For example, under the current tables, IRS tables say that a family of 4 living in Fulton County may spend $1,529 for rent or a mortgage. If the actual mortgage for that family of 4 is $1,900, then for means test purposes $371 (the difference between $1,900 and $1,529) is "disposable" and available to use in a Chapter 13 payment.
If you actually file a Chapter 13, however, you can claim the full $1,900 as your mortgage expense on Schedule J of your budget. For Chapter 13 purposes, your budget must be reasonable and you are subject to the good faith requirements of the Kitchens case at its progeny.
The means test only serves to tell you (1) that Chapter 7 is or is not an option (2) if you have to file a Chapter 13, whether that Chapter 13 can be a 3 year plan or must it be a 5 year plan.
The "disposable income" bottom line of the means test has no correlation with a real life budget that you would actually file in your Chapter 13 case (or Chapter 7 case for that matter). In fact, I would suggest that there is almost no likelihood that your Schedule I & J budget will match your means test budget. I have actually been questioned about this by Chapter 7 trustees and my response has been to advise the trustee that the means test does not reflect a real budget and it was never intended to represent a real budget. There is nothing in the Code to suggest that IRS budget categories should be use on Schedules I & J.
The judges in the Northern District appear to be on board with this understanding. Both Judge Mullins and Judge Massey have ruled that the debtors' actual disposable income controls over the theoretical disposable income as determined by the means test. Presumably this means that a Chapter 13 debtor can qualify for a 3 year plan based on actual disposable income even if the means test budget shows sufficient disposable income to mandate a 5 year plan.
So, recognize the means test for what it is – a qualification tool, but nothing more.
Technorati Tags: means test, median income test, Judge James Massey, Judge C. Ray Mullins, means test in Georgia, means test 11th Circuit
Filed under Georgia Bankruptcy, Means Test issues by
Florida Attorney Jonathan Alper discusses in his Florida Bankruptcy blog several important considerations if you are thinking about turning to a family member to help you buy a car prior to filing bankruptcy. In a scenario I have seen on occasion, Jonathan describes meeting with a client who had asked his parents to help him buy a car. The parents bought the car, but titled it in the debtor (son's) name and never recorded a lien to secure their loan to the son.
In this situation, the "loan" from the parents is unsecured (no different than a credit card) and, worse, the son cannot include the monthly car payment as a secured debt for means test purposes. For bankruptcy purposes, therefore, this car is owned free and clear by the son/debtor and it counts as an asset.
The big picture point here, I think, is that if you are thinking about filing for bankruptcy, you should never take drastic action like buying or selling a car or house without first speaking to your lawyer. Even if those recent transactions can be reversed, they may still count against you in Bankruptcy Court.
Technorati Tags: family car loans, means test, pre-bankruptcy planning, Chapter 7, Georgia bankruptcy, Georgia Chapter 7
Filed under Georgia Bankruptcy, Means Test issues, Protected property issues by
Thans to Judge Homer Drake, we have an answer to this question in the Northern District of Georgia. In the Walker case (2006 Bankr. LEXIS 845, Case No. 05-15010 (Bankr. N.D. Ga. May 1, 2006), Judge Drake overruled an objection by the U.S. Trustee. In this case, the debtor's Chapter 7 Statement of Intentions provided for the surrender of his house and vehicle. The Means Test filed by the debtor had allocations for payments to both the mortgage and vehicle lenders. The Trustee objected to the inclusion of these allocations when the debtor intended to surrender the collateral.
Judge Drake found that the Means Test was intended as a snapshot of the debtor's financial situation at the instant of filing and that at the time of filing, these payments were contractually due to the lenders. Further, Judge Drake found that since the Means Test could potentially penalize the debtor by using a six month lookback as evidence of future income then the Means Test is by its nature is not intended to reflect the debtor's current reality.
Judge Drake also noted that the trustee can still object to discharge under Section 707(b)(3) which allows the Court to consider the totality of the circumstances.
You can read more about Judge Drake's decision at the blog post on Scott Riddle's Georgia Bankruptcy Law Blog.
Technorati Tags: means test, median income test, treatment of secured debts in means test, Judge Homer Drake
Filed under Chapter 13 issues, Georgia Bankruptcy, Means Test issues by
Over the past few weeks, I have received objections in two Chapter 7 cases from the U.S. Trustee having to do with the median income/means test Form 22A. Under the new law, debtors must fit within these tests in order to qualify for Chapter 7. The first part of the test is called the "median income" test. Under this (simple) test, if your household income is below the average income for a similarly sized family in your State, then you qualify for Chapter 7. The average income figures are built into my bankruptcy preparation program, but if you want to see these figures, you can look at them on the U.S. Trustee's web site. If your income exceeds the average, you can still qualify for Chapter 7 if you pass the "means test." This is where we compare your monthly income (generated from an averaging of your gross income over the past 6 months) to a pro-forma budget using IRS derived budget numbers. If your real life expense numbers are higher than the means test numbers, you are most likely out of luck. The means test does contain a small window where a Bankruptcy Judge can find that a particular expense is "reasonable." The problem, of course, is that the U.S. Trustee is taking a very conservative approach and most debtors do not have the money to pay for research and litigation. Two issues have come up recently – be aware of these if you are a lawyer or a debtor planning to file: 1. Reasonableness of supporting a college aged child – the U.S. Trustee will object if you include food, housing and transportation expenses for a college aged child. According to the trustee, these expenses are not necessary. 2. Vehicle leases – the U.S. Trustee contends that leased vehicles are not secured debts therefore the lease cost may not be an allowable expense in the pro forma budget. It seems to me that both leases and purchases are "ownership costs" such that it would be absurd to disallow lease payments, but it appears that is exactly what the trustee is doing. I have a meeting scheduled for later this week to discuss these issues with an attorney in the trustee's office – perhaps I will get some clarification. –Jonathan
Technorati Tags: vehicle leases, bankruptcy, Chapter 7, Chapter 13
Filed under Georgia Bankruptcy, leased vehicles in bankruptcy, Means Test issues by
