Bankruptcy Means Test

The bankruptcy means test is a calculation designed to identify debtors who can afford to pay some of their unsecured debts (for instance, credit card debt) and encourage repayment of these debts through a Chapter 13 repayment plan.  The first part of the means test determines whether your current monthly income is less than your state’s median income for a household of your size.  

If your family’s income is less than your state’s median income for a family of your size, you PASS the means test.  There is no other testing and you can proceed with a Chapter 7 bankruptcy.  The current state median income figures can be found at the U.S. Trustee’s website: http://www.usdoj.gov/ust/eo/bapcpa/meanstesting.htm. 

If your family’s income is more than your state’s median income, you must complete the means test worksheet to calculate if you have (or should have) money to repay unsecured creditors.  In the end if you are able to pay a significant portion of your unsecured debt, you will FAIL the means test and cannot file a Chapter 7 bankruptcy. 

The truth is that most debtors pass the means test without any difficulty based upon their income.  Others pass the means test after a skilled bankruptcy attorney has examined your income sources and made certain elections in completing the calculation.  That is not to say that the test can be manipulated!  On the contrary, the skilled bankruptcy attorney will work within the bankruptcy statutes, rules, case law, and local interpretations (which can vary a great deal among jurisdictions!) to obtain the best result from the means test.  

If you would like to “test-drive” the means test, Nolo Publishing has a free on-line calculator.  The Nolo calculator uses the language and formatting of Official Form B 22A, the means test form required in Chapter 7 bankruptcy cases.  Be warned: passing the means test can be complex and is more than simply crunching numbers! 

If you have questions or concerns about passing the means test, seek out competent legal advice.  An experienced bankruptcy attorney can guide you through the means test to reach the best possible result for your circumstances.

Law of Unintended Consequences Hurts Big Banks

In 2004 and 2005, the banking industry spent millions lobbying for tougher bankruptcy laws.  Washington Mutual, Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc. collectively spent $25 million during that period.  The big banks’ efforts paid off in a major overhaul of the Bankruptcy Code in 2005 making it more difficult for struggling families to discharge credit card debt.  However, the banks did not foresee the current housing crisis, and new research suggests that the 2005 changes to the Bankruptcy Code may have caused mortgage default rates to rise. 

A paper published by the National Bureau of Economic Research states that the 2005 changes “raised the cost of filing and reduced the amount of debt that is discharged” thereby making it more difficult for debtors “to shift funds from paying other debts to paying their mortgages[.]“  In other words, before the 2005 changes, many debtors struggling with a mortgage arrears and credit card debt could file bankruptcy, discharge the credit card debt, and free-up money to pay the mortgage.  The new bankruptcy provisions make this process more difficult.  As a result, fewer debtors are able to afford to save their homes through the bankruptcy process. 

Jay Westbrook, a professor of business law at the University of Texas Law School in Austin and a former adviser to the International Monetary Fund and the World Bank said, “Be careful what you wish for.  [The banks] wanted to make sure that people kept paying their credit cards, and what they’re getting is more foreclosures.” 

If you are facing overwhelming debt and want to keep your home, there are many alternatives available to you.  An experienced bankruptcy attorney can review your finances and explain your legal options for discharging or repaying your debts.  Bankruptcy is not the only option for saving a home from foreclosure, and many cases are successfully resolved using a combination of bankruptcy and non-bankruptcy methods.  Get the facts today and solve your debt dilemma!

Short Sale Tax Consequences

A short sale is the sale of real estate for less than the balance owed on the property. Short sales are common in today’s real estate market, where home prices have fallen and the home owner is no longer able to pay the mortgage loan. A short sale takes cooperation between the home owner and the lender to sell the property at a loss. Both parties must consent to the sale. A short sale can avoid a foreclosure, which can be mutually beneficial to the parties. The lender avoids the expense of a foreclosure and the home owner avoids the negative impact on personal credit. 

Short sales were seldom used by homeowners prior to the mortgage crisis because a short sale results in a deficiency balance obligation to the homeowner. The home owner was sometimes sued for the difference between the amount owed on the home and the short sale price, or, more commonly was taxed by the IRS on the amount “forgiven” by the lender. Either way, a short sale created another heavy burden on the home owner. 

In response to the mortgage crisis, the Mortgage Forgiveness Debt Relief Act was signed into law in 2007 which excludes from income a discharge of debt on a principle residence. Debt forgiven by a lender in connection with a foreclosure, refinance, or short sale in calendar years 2007 through 2012 is eligible for this relief. Up to $2 million is excluded ($1 million if married filing separately). This relief only applies to a principal residence, and does not include a second home, credit cards, or a car loan. 

A forgiven debt is generally taxed as income to the tax payer, but that is not always the case. The most common exclusions of this tax are: (1) if the tax payer was insolvent immediately before the debt was forgiven; (2) if the debt was discharged in bankruptcy; or (3) if the debt is a qualified principal residence indebtedness until 2012. 

If you are struggling with a home mortgage and need to walk away, consult with an experienced bankruptcy attorney and learn how the law can work for you. Your attorney can explain your options and together you can make the decisions for a better financial future.

How Chapter 7 Affects Sole Proprietors

Most businesses are legal entities separate from the individual owners. Microsoft, for instance, is not the same as Bill Gates. Corporations, LLCs and the like are recognized as operating independent from the business’s owners. When an incorporated business files bankruptcy, the owners are not in bankruptcy, and vice-versa. 

On the other hand, when the business is a sole proprietor, the owner is the same as the business. The business is not a legal entity that is separate from the individual. In fact, the business is not recognized as existing apart from its owner. The business income, expenses, property, and debts all belong to the owner. Therefore, when a sole proprietor files bankruptcy, the business is also bankrupt. 

The Chapter 7 trustee who administers your bankruptcy case is under a mandate to seize control and cease operations of your business. The main reason for this is that the business assets are considered personal assets and part of the bankruptcy estate. Fortunately, in most cases personal exemptions are able to protect tools and equipment used in the sole proprietor’s business. 

Accounts receivable are also part of the bankruptcy estate, so it is important to provide accurate business records to assist your attorney before your bankruptcy is filed. The trustee will want to see all gross income received by the business, and all business expenses. Since this gross income is included in your personal gross income, business income can sometimes push the total family income over the qualifying ceiling for Chapter 7 bankruptcy. Additionally, business debt is considered personal debt, so it is generally included in the bankruptcy discharge. 

Every sole proprietor bankruptcy case is different. For instance, in a case where the debtor runs a day care from her home, there may be little or no business inventory or assets. In bankruptcy terms, there are no business assets for the debtor’s estate. However, where the sole proprietor runs a restaurant, there may be significant assets for the bankruptcy estate. It is important for you to speak candidly with your attorney and discuss your sole proprietor business thoroughly. Your attorney can effectively advise you on the best future action including whether it is permissible to continue business operations, whether you should form a corporation or LLC, or taking some other action to best protect your interests. If you are dealing with a personal financial difficulty, speak with an experienced bankruptcy attorney before making any decisions regarding your sole proprietor business.

When a Creditor Garnishes Your Bank Account

After a court enters a money judgment against you, the judgment creditor can proceed to collect. Many experienced creditors like to start the post-judgment collection process by attacking your bank account.  In this way the creditor can attempt to seize a lump sum payment before settling in to collect from your wages. 

A bank account garnishment begins with the court directing the bank to freeze your bank account and turn over funds to the sheriff.  Once your account is frozen, any outstanding check will be refused payment (unless the amount of the judgment is less than the amount on deposit at your bank, then the bank can only partially freeze your account).  A garnished bank account can cause many problems for the debtor, especially when executed just after payday. 

Bank account garnishments are almost always a surprise.  The judgment creditor or collecting agent (often the sheriff of your county) must notify you and the bank, but typically the bank is first notified to freeze your account, then you are notified by regular mail.  This prevents any possibility that you can withdraw funds before the garnishment takes your money. 

There are defenses to a bank garnishment.  You may claim that all or a part of the deposited funds are exempt under state or federal law.  The notice of garnishment is often accompanied by a list of possible exemptions and notice procedures.  For instance, Social Security payments are generally exempt from garnishment.  However, once a Social Security payment is deposited into your account and co-mingled with other funds, the question becomes “what part of the account balance is Social Security (and exempt) and what part is not?”  A hearing is required to determine this answer and the burden is on you to prove that the funds in the account are exempt from creditor collection. 

Filing bankruptcy stops the commencement or continuation of a bank garnishment.  Bankruptcy stops collection actions and will discharge most judgments.  If there is a judgment against you and you fear a future bank account garnishment, speak with an experienced attorney and discuss how the federal bankruptcy laws can stop a judgment creditor cold.

Bankruptcy Can Provide A Second Chance At Financial Success

Some individuals are reluctant to use the federal bankruptcy process to legally adjust an unmanageable personal financial condition. Many of these people view bankruptcy as a personal failure, something to be avoided at all costs. In truth, bankruptcy is not a declaration of failure; it is simply the recognition of an inability to pay creditors. This may be caused by financial mismanagement; or it may result from illness, job loss, or another catastrophic event beyond your control. 

The United States has historically been called as a country of second chances and opportunity. Consequently, it is not surprising that the United States is more forgiving of failure and ready to give the honest person a second chance. In 1934 the Supreme Court stated that the purpose of bankruptcy law to give the “honest but unfortunate debtor . . . a new opportunity in life and a clear field for future effort.”  Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934).  Bankruptcy attorneys often refer to this “new opportunity” as a financial “fresh start” that is provided by the bankruptcy discharge. 

Bankruptcy is not about the end of something, it is the beginning. It is a chance to restart without the burden of unmanageable debt. Bankruptcy is, what some of today’s economists call “failing forward.” When a person files bankruptcy, she is using the law to restructure her finances so that her chance of future success is more likely. American humorist Will Rogers once said, “Good judgment comes from experience, and a lot of that comes from bad judgment.” Obviously, a large part of “failing forward” is not repeating past mistakes, but mostly it is giving yourself, now wiser and armed with good judgment, a second chance to do better. 

If you are struggling with unmanageable debt and need to legally restructure your finances, consult with an experienced bankruptcy attorney. The federal bankruptcy laws can provide a second chance at a bright financial future, and an escape from a life buried in debt.

Talk To An Attorney Before Taking A Second Job

Many individuals trying to make ends meet take on extra work to pay off debt.  In some cases the added income is enough to make a difference.  In other cases the second job makes no difference, or can even make the financial situation worse. 

Working a second job can often create additional unexpected expenses.  Additional travel, food, and child care costs are a few added expenses that will eat away at any increased income.  A second job can create more stress on the family when one spouse is working and the other spouse must increase his or her responsibilities at home. 

For some people increasing the family’s income can have a big negative consequence on a future bankruptcy.  The bankruptcy “means test” is a calculation that determines whether your income is low enough for you to file Chapter 7 bankruptcy.  The means test is designed to prevent individuals with the ability to pay creditors from filing a Chapter 7 bankruptcy.  Higher income debtors must file Chapter 13 and repay their debts over five years. 

When a family that would otherwise pass the bankruptcy means test increases its income, there is a danger that the increase will push the income over the threshold and force the debtors into Chapter 13.  Additionally, the trustee may flag the case for abuse when a debtor voluntarily quits a job and decreases the family income prior to filing bankruptcy.  The debtor is demonstrating that he could afford to repay something, but has chosen to not pay creditors by quitting the second job. 

If you are struggling with debt, consult with an experienced bankruptcy attorney before taking on a second job.  It is important to have an understanding of the risks involved and a clear strategy for getting out of debt.  As the saying goes, “Hope for the best, but plan for the worst.”  Just make sure that your plan doesn’t leave you in a worse financial position.

Rising Gas Prices Impact Debtors in Bankruptcy

Debtors in bankruptcy are required to disclose all household income and expenses. While the debtor’s income is often relatively easy to determine through pay stubs and bank records, calculating expenses can be more elusive. When completing your bankruptcy schedules it is important to be realistic. Often changes in the economy can significantly affect your budget. The recent spike in gas prices has impacted the budgets of American families, and changes calculations within your bankruptcy case. 

The U.S. Energy Information Administration recently determined that the average price for a gallon of regular unleaded gas in the United States is $3.567. That is a change of almost $.78 from the same time last year. Many economists believe that the national average will climb to over $4.00 per gallon. In fact, in some states (notably California) gas is already over the $4.00 mark. 

It is important to account for this increase in your family’s budget. If you drive 12,000 miles per year and your car averages 25 miles per gallon, you use 480 gallons of gas per year, or 40 gallons per month. At the national average price of $3.567 per gallon, you spend almost $143 per month on gas. That is already $31 more per month/per vehicle than a year ago. If gas prices climb to $4.00 per gallon, the additional cost to a two income, two car family will be approximately $97 per month more than last year. 

Higher gas prices have also contributed to an increase in food prices. According to the U.S Department of Agriculture, food prices for a family of four with school-aged children averaged $1184.50 during the month of January. That’s $26.20 per month more than the same time last year. 

While not every budget increase will necessitate a change in your bankruptcy schedules, any significant change that occurs after you sign your bankruptcy schedules should be brought to the attention of your bankruptcy attorney. While only a small percentage of cases will be affected by increases to a debtor’s expenses, it is important to keep your attorney apprised of changes in your finances during your case.

Your Post-Discharge Debt

Most bankruptcy cases end with a discharge order from a federal bankruptcy judge.  The discharge is a permanent injunction that prohibits pre-bankruptcy creditors from collecting against the debtor, and is a “fresh start” for the debtor.  It effectively eliminates many debts and allows the debtor to start over with his or her finances. 

Taking care of your finances after receiving your bankruptcy discharge is extremely important.  The bankruptcy law requires that you complete a financial management course prior to your discharge which teaches basic management techniques.  While this course is helpful, the first step in managing your finances after your bankruptcy is to identify any post-discharge debts. 

First, what personal debt survived your bankruptcy case?  Post-discharge personal debt generally falls into one of three categories: (1) debt automatically excepted from discharge; (2) debt excepted from discharge by court order; and (3) post-petition debts.  Debts automatically excepted from discharge include student loans, most taxes, and child support obligations.  Debts excepted from discharge by court order include debts involving fraud or other bad conduct.  Post-petition debts are debts that first arise after the day you file your bankruptcy case.  Post-petition debts are not included in your bankruptcy case and are not discharged. 

Second, do you have property debt that survived the bankruptcy?  In certain cases the personal obligation to pay a debt may be discharged, but the property lien survives.  Although you owe nothing to the creditor, items secured by a property lien may be repossessed.  Consult with your attorney and determine what, if any, property may be at risk of repossession after your bankruptcy. 

Finally, did you agree to any new financial obligation during your bankruptcy case?  Be clear about any new or changed financial obligation that you agreed to during your bankruptcy case.  If you executed a reaffirmation agreement, redemption loan, or modification, make sure you understand the terms and obligations contained in that agreement. 

You and your attorney should discuss the impact of your bankruptcy discharge on your debts.  Be certain that you understand which obligations are discharged and which survive the bankruptcy case.  Your bankruptcy attorney is happy to discuss your options for managing any debt that survives the bankruptcy discharge.

Beware of Payday Lenders in Bankers’ Clothing

For over a year some national banks have been offering “checking advances” to their cash-strapped customers.  A Checking advance is a short term loan between $100 and $500 which must be repaid within 30 days.  Typically the bank will take all direct deposits made into the borrower’s bank account until the loan is paid. 

Critics have described this practice as a thinly disguised “payday loan,” since the loan is intended to provide cash to the borrower until his or her next payday and direct deposit.  With fees of 20% per $20.00 borrowed, the effective annual percentage rate is 130% when the loan is repaid on the thirtieth day.  U.S. Bank, Fifth Third Bank and Wells Fargo are three banks that offer this service to account holders. 

The checking advance repayment terms can have unexpected consequences for the borrower.  For instance, taking a checking advance two days before your direct deposit payday means that you have paid the bank between $10 and $50 for a two day loan.  The loan period is simply until the next direct deposit, or the expiration of thirty days.  At the end of thirty days the bank will withdraw the funds from your account, usually without notice.  This withdrawal may cause an overdraft of your account and additional fees.  Unlike payday loans, checking advance customers are unable to control and post-pone payment of the loan until the end of the loan period.  Some banking customers find themselves forced to take a series of advances until they are able to afford to repay the loan. 

Bankruptcy can discharge checking advance loans as well as payday loans.  These short term loans can cause significant damage to a families’ budget and cost hundreds of dollars in fees.  It is usually advisable for clients who wish to discharge a bank’s checking advance to open up another account at a different bank.  This will avoid any complications if the bank attempts to take money out of your account to repay the loan. 

If you need to get out from under checking advance loans, payday loans, or other high interest loans, speak with an experienced bankruptcy attorney and discover how the federal bankruptcy laws can provide you with relief.  Your bankruptcy attorney can explain the best way to discharge these loans and set you on a course for a better financial future.

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