January 20, 2020

How Big is my Household for Chapter 7 or Chapter 13 Means Test Purposes?

I have written a lot on this blog about the median income test and the means test.  Each of these pre-filing calculations turn on both your household income as well as your family size.

While it would seem that the number of people in your family ought to be easy to calculate, it turns out that issues do arise relating to this very important calculation.

I recently received an email from a blog reader named Sheila who asks the following law school exam type of question:

I have been told conflicting things about determining household size for purposes of the chapter 7 means test.  My 20 year old son currently lives with me for free. He will probably move out in the next couple months.  My 18 year old daughter lives with me, but will be going away to college in the fall. A divorce decree allows my ex-husband to use her as a dependent for tax purposes.   My 16 year old daughter lives with me and is my dependent for tax purposes.  How do I determine my household size for the purpose of the means test?

Here is my response: [Read more…]

How are Year End Bonuses Treated in a Median Income Test Calculation?

When I meet with a potential client, one of the first calculations I run is a “median income test” evaluation.   The median income test adds up your gross income from all sources during the six months preceding the month of filing, then divides by six to arrive at a monthly average.  If that monthly average exceeds the median income for a similarly sized family in Georgia (or other applicable State), then you “fail” the median income test and a “presumption of abuse” arises.  As a practical matter, above-median debtors often find themselves in a Chapter 13 repayment plan rather than a Chapter 7 liquidation.

How should the median income calculation deal with Christmas bonsues?  If we read the Bankruptcy Code literally, a Christmas bonus will distort your median income calculation if you file your case in January, February, March, April, May or June.  A June filing, for example, would look at gross income during December through May to generate a monthly average.  A July filing, by contrast, would look at gross income for January through June, and not count any Christmas bonuses. [Read more…]

File Your Bankruptcy by the End of the Month or Start the Process Over

If you read this blog and other consumer bankruptcy blogs like Scott Riddle’s Georgia Bankruptcy blog or the Bankruptcy Law Network blog, you know that preparing for filing a case involves a great deal of effort on your part to collect information and documents.  Are there any steps that you as the potential bankruptcy debtor can take to speed up the process and to keep costs down.

My Bankruptcy Law Network colleague, Michael Doan, has posted a very useful article about the timing of filing.  Specifically, Michael points out that if you start the bankruptcy information gathering process towards the end of a month, and the process rolls over to the next month, then a lot of the work has to be redone.  For example, the six month medican income test look back would involve a new six month period, your credit counseling certificate validity date may run out and the required tax return might change.  I encourage you to take a look at Michael’s well thought out post entitled "File by the End of the Month or Start Over."

I think that in a big picture sense, what Michael is saying is that you need to communicate regularly and accurately with your lawyer.  If you meet with your lawyer on the 20th of the month and promise to have all necessary documentation by the 27th, but you end up rescheduling your appointment to the 5th of the following month, don’t be surprised if you have to pay a higher fee to account for all the new calculations.

In my practice, I do not start the time consuming process of analyzing pay stubs and figuring out the median income and/or means test until I have pretty much all of the required documentation.  This means that I can’t give my client bottom line numbers unless and until my client provides me with pay stubs and tax returns.  I can still give a "big picture" analysis based on my experience, but the actual number crunching has to wait.   This is a major shift from pre-BAPCPA practice where I could run numbers almost immediately.

Some of my colleagues are more willing to tolerate the risk of not getting documentation in time and they end up running their calculations two or three times.  If you are a lawyer and this is how you have set up your practice, I would advise you to keep your notes so at least your’ll have a head start on the calculations.

Chapter 7 and Middle Class Debtors

Over the past few weeks, I have received several emails from potential clients that begin with lines like “my salary is over $100,000 and I need to file Chapter 7 to protect myself against lawsuits from credit card companies” or “together, my wife and I earn well over $100,000 but we need to file Chapter 7 because….”

In each of these cases, I have had to respond to the prospective client with the bad news that about 99% of the time, Chapter 7 is not going to be available to an individual or couple whose household income exceeds $100,000.   Why?  Under the current bankruptcy law, something called a “presumption of abuse” arises is your gross household income exceeds the “median income” for a similarly sized family in the State where you live.

In Georgia, where I practice, the median income for a family of 4 is $66,711.  If there are more than 4 people in a household, you would add $6,900.  If you make $100,000, you would need a family of 9 to fit within the median.  Note that these figures will be adjusted upward as of January 1, 2008 but the general principle here still applies.

If you do not meet the median income test, you could still qualify for Chapter 7 under something called a “means test” which allows you to deduct certain permitted expenses from your median income figure.  Unfortunately the means test is derived from IRS calculations used when people negotiate installment payments on overdue tax debt.  In other words, you don’t get a lot of deductions.

As a practical matter, you might squeeze into a Chapter 7 if your income is just over the median, but if you are $20,000 or $30,000 over the median, you are facing a real uphill battle.

If you don’t fit into a Chapter 7, your only alternative is Chapter 13.   Here, too, the $100,000 income family is likely to feel a squeeze.  My experience with the means test suggests that families the $70,000 to $100,000 range won’t qualify for Chapter 7, and the means test will require a Chapter 13 payment that often is not affordable.

Over the next few weeks, I’ll be working on a video presentation that will demonstrate how the means test works.

Can I File Bankruptcy Without Involving My Spouse?

married person can file individual bankruptcyIf you are married, can you file an individual Chapter 7 or Chapter 13 and not include your spouse?

Yes you can.  Regardless of whether you are married or separated, you can file bankruptcy on your own even if  your spouse does not want to cooperate.   Further, you non-filing spouse’s credit will not be damaged by your bankruptcy filing,  unless there are joint debts that end up not getting paid in your case.

If you are married, however, your non-filing spouse’s income and expense information, and possible his/her asset information may be relevant to your case and may have to be revealed.

The bankruptcy law requires us to consider household income, which means that your spouse’s income has to be considered.   The law assumes that two people living together as husband and wife both contribute to the household 1   If, however, you and your spouse have separated out your income and expense obligations, we can make an argument that some or all of your spouse’s income or expenses should not be counted in your case.

While filing jointly with your spouse is not required, it can sometimes make a lot of sense.  I often run “what if” scenarios with potential clients and their skeptical spouses to reveal the benefits and the downsides to a joint filing. [Read more…]

  1. By the way, Georgia is not a community property State.  For those of you who live in community property States, the analysis I am describing may not apply.   My Bankruptcy Law Network colleague Cathy Moran writes often about community property issues and bankruptcy on the BLN blog.

CCCS vs. Bankruptcy – What Makes the Most Sense?

I am sitting here wondering two things…am I qualify to file bankruptcy and should I file bankruptcy.
I have unsecured debts…c/Cards and student loans avg. 50,000.  I have a mortgage of 1.000 monthly.  I AM ENROLLED IN CCCS AND IS PAYING ABOUT 900.00 monthly.  I have high medical bills and child support payments avg. 600 monthly…after working many many hours of overtime my income last year was 54,000.  I am single/seperated…what should I do and how should I do it….HELP.

Jonathan Ginsberg responds:  Jeff, thanks for your question.  Here is how I would analyze your situation:

  1. Bankruptcy is always a last resort.  Whatever positive information you hear about bankruptcy (and there are some positives), you always run a risk when you file for bankruptcy.  Why?  Your financial future will be in the hands of others (trustees, judges).  Creditors can put you in the position of having to litigate (expensive) or give up bankruptcy protection.  While most bankruptcy cases process through the system without hassles, there is always the chance that your case could blow up.  Additionally, you will see your credit score destroyed (at least in the short term) if you file for bankruptcy.
  2. Given your income, I would think that you would be limited to filing Chapter 13.   Although the median income limit for a single individual changes once or twice a year, the current median income for an individual filing in Georgia will be in the $40,000 range.  Your income is significantly higher – therefore I suspect that you will be looking at a Chapter 13.
  3. Currently, you are paying $900 per month + your mortgage + high on-going medical expenses.  Chapter 13 might make sense if it could reduce that $900 payment to $600 or  $500.   The only way to know that would be to submit all of your financial information to a bankruptcy lawyer for a personalized review.  If you want me to review, I would direct you to a special download page of my Atlanta bankruptcy web site, where I identify exactly what I need to analyze your specific case for a possible bankruptcy.


Am I Allowed to Include in my Means Test Calculation an Allocation for Payments to Secured Creditors When I am Surrendering the Collateral?

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 look back 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.

Bankruptcy process to become even more burdensome to low income debtors?

NACBA (National Association of Consumer Bankruptcy Attorneys) recently distributed a letter from Senators Chuck Grassley and Jeff Sessions to Justice John Roberts, the Chief Justice of the United States.  The Chief Justice is the head of the Committee on Practice and Procedure of the Judicial Conference.  This Committee is the organization that drafts and revises the official bankruptcy forms that must be used in the nation’s bankruptcy courts.

In this letter, Senators Grassley and Sessions express dismay that the forms created after the enactment of the new law do not require low income debtors to complete extensive financial disclosures.

Currently, debtors whose incomes fall below the average income for their State of residence do not need to fill out around 10 pages of forms – presumably if their income is below the State average, they are not abusing the process.

As a practicing lawyer who sees struggling debtors on a regular basis, I find this mean spirited letter by Senators Grassley and Sessions disturbing.  In my view, the only impact that these proposed rule changes would have would be to drive up the cost of bankruptcy.  We have already seen the filing fee jump from $194 to $299 in Chapter 7.  Attorneys fees charged by most debtor’s lawyers have gone up dramatically because the new law imposes significant and burdensome filing requirements.  And the credit counseling requirements of the new law require cash strapped debtors to spend at least an extra $100 to get their two certificates.

Fifteen years ago, I was charging $600 total for a Chapter 7, including the filing fee.  Now, if you want a decent lawyer, you are looking at close to $2,000 for the same service.

I wonder if Senators Grassley or Sessions have ever spent a day with a debtor’s lawyer talking to the distraught families who have made the difficult decision to file for bankruptcy.  Or have they spent a day in the 341 hearing room listening to debtor after debtor testify about financial hardship brought about by job loss, divorce or illness.  Or have they watched a Motion for Relief calendar where bankruptcy judges have had to tell mothers and fathers that they will be losing their homes.

Every responsible lawyer and citizen should want honesty and integrity in the bankruptcy process.  Study after study has shown that most bankruptcy debtors are not abusing the system.  It strikes me as the epitome of hypocrisy that a Congress who squanders billions of our tax dollars would take such an interest in solving a problem that does not exist when its own house is not clean.

Interestingly, the Citizens Against Government Waste awarded Senator Grassley its Porker of the Month in May, 2005 for adding $11 billion to a transportation bill.

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