If you’re a low-income filer, you’ll likely qualify for Chapter 7 bankruptcy based on your gross income alone. Even if you make too much money to pass the Chapter 7 means test automatically, you might still be able to qualify for Chapter 7 karacto.xyz two-part means test allows you to deduct certain expenses in full to reduce your disposable karacto.xyz: Cara O'neill, Attorney. The bankruptcy Means Test allows debtors to deduct the payments they make on their vehicle. So in this particular situation dumping your car payment might work against your desire to file Chapter 7 bankruptcy. Make sure you deduct your tax obligations. For those individuals that owe taxes at the end of the year, the bankruptcy Means Test allows. Category: Means Test Forms Effective on April 1, Official Bankruptcy Forms are approved by the Judicial Conference and must be used under Bankruptcy Rule
However, there is no clear-cut answer in this jurisdiction as to whether personal income tax obligations are consumer debts or not. Courts outside of New York and the Second Circuit have reached different conclusions on income tax debt. In one case in the Sixth Circuit, the court rejected the application of the profit motive test, concluding that income taxes can be distinguished from consumer debts for several reasons. Tax debts are not incurred like consumer debts as they are not incurred voluntarily.
Tax debt is assessed for the benefit of the general public whereas consumer debt is incurred for personal and household purposes. Finally, tax debt arises from income and earning money whereas consumer debt results from consumption and spending money. In re Westberry , F. Most of the debtors that I have represented in my Long Island bankruptcy practice who were able to make a means test business debt declaration were victims of a failed business who owed substantial sums — either directly or through personal guaranties — to various trade creditors, taxing authorities or business partners.
Most individuals with a failed mom and pop business will not be able to take this shortcut as their mortgage debt alone will likely exceed their business debt. Just because a debtor can by-pass the means test does not mean that a debtor can use it as a loophole to escape other good faith requirements.
In a Michigan decision from earlier this year, the bankruptcy court addressed a situation involving husband and wife debtors whose debts were genuinely primarily business debts.
They had over six million dollars of unsecured debts from failed real estate investments. The court commented that even though the debtors did not fail the means test, they nevertheless lacked good faith because they could have easily adjusted their budget while still maintaining a nice lifestyle, and paid their creditors a significant dividend through a Chapter 11 plan.
In re Rahim and Abdulhussain , No. If the characterization of a particular debt that is not clear-cut in this jurisdiction, such as tax debt, enables your client to pass the means test, how should you tackle the situation? That really depends on how aggressive you want to be. My recommendation is to take an aggressive position as long as it is reasonable and you have a good basis for taking your position.
You should be prepared for presenting your arguments to the U. Trustee brings. About the Author. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. The state median income figures that you need to use for the means test change periodically.
The change before that was November 1, The means test median income figures usually change twice a year — in March and November. However, the changes going into effect next month will make it slightly harder for most Long Island and New York consumers. In order to automatically pass the bankruptcy means test your income must be less than the median income in the state where you live. These figures routinely change once or twice a year.
Pursuant to 11 U. Usually, income rises each and every year because of inflation, the cost of living, etc. Although there was a little bit of inflation after that, we have since gone through another round of deflation. It appears that we may not be heading out of the recession so fast, as median family income has decreased over the past six months. Accordingly, debtors will suffer.
Links to Official U. This is a comprehensive, very complex series of calculations that the federal government designed to ascertain whether someone qualifies for Chapter 7 filing. Under the old bankruptcy law, almost anyone could seek to eliminate their debts by filing Chapter 7. The new laws changed that. The Means Test formula is designed to evaluate whether a debtor has the financial means to pay back a substantial portion of his or her debts. If the person does, then he or she may not be eligible to file Chapter 7 bankruptcy , and may instead have to file a payment plan bankruptcy under Chapter If not, the debtor must have a sufficient amount of acceptable deductions permitted by the Means Test.
Making the most of qualifying under the means test and making the figures work for you requires that you meet with an experienced Long Island bankruptcy attorney to ascertain eligibility for filing for bankruptcy relief. You can see them by clicking the category, Bankruptcy Means Test.
Determining Household Size for the Means Test. Important Note as of October 18, It seems the means test median income figures change twice a year to coordinate with the changes to daylight savings time. However, the changes going into effect in two weeks will make it slightly easier for most Long Island consumers. However, it appears that we may be heading out of the recession as median family income has increased over the past six months.
Accordingly, debtors will benefit. In our jurisdiction, the U. Representing such debtors requires addressing certain special issues which I will focus on in this article which was originally published in the June Issue of the Suffolk Lawyer, a Bar Association periodical.
Perhaps the current drawn-out recession is affecting an increasing number of consumers beyond the low and middle-class — long the bastion of typical bankruptcy filers. Many middle and upper-class Americans have thus lost their ultimate source of long-term savings.
After all, if a Chapter 7 case goes smoothly, the debtor will discharge most or all debts and ideally keep all assets. For high-income debtors, Chapter 7 eligibility has become rather challenging considering that under the Bankruptcy Amendment Act BAPCPA , a consumer debtor will almost certainly face opposition to getting a discharge if he or she does not pass the means test.
There is no salary cap for filing Chapter 7 Bankruptcy. The U. Trustee is especially vigilant in reviewing any case that is deemed abusive, or that may even be close to being abusive. Accordingly, analyzing the facts of a high-income debtor becomes critical and properly preparing the means test and other bankruptcy schedules becomes crucial.
Considering the perceived income limitations for seeking Chapter 7 relief under the new bankruptcy laws, such high-income filings seem difficult or impossible; yet in practice, they are not. In my bankruptcy practice, high-income debtors are often executives, doctors, assorted professionals, and families of double-income spouses. General Principle for Filing High-income Cases. A high-income debtor can file for Chapter 7 relief if the debtor a passes the means test or conversely does not need to qualify for the means test; and b passes a totality of circumstances test for filing in good faith — often meaning that all of their expenses are reasonable and necessary.
Many high-income debtors also have relatively high levels of debt. A former executive previously earning several hundred thousand dollars per year can easily have as much credit card debt. Counsel should devote extra time to reviewing the various debts in such cases.
Many high-income debtors have very substantial debt obligations from failed business ventures, often due to having signed a personal guarantee. Certain individuals are able to pass the means test much more easily than others. Those that have large families with multiple dependants, large mortgages, two car loans or leases, mortgage arrears and tax arrears are more likely to qualify under the means test because these items can all be used as means test deductions.
Since individuals with large famlies can benefit from increased means test deductions, consider issues in Determining Household Size for the Means Test. Frequently, individuals with high income receive year-end bonuses. By timing the filing of the petition, the impact of year-end bonuses on the means test can be minimized or even reduced. Even if the debtor passes the means test, that alone is not enough to demonstrate that the case is not abusive, and that it is filed in good faith.
For example, the U. Some expenses will not pass muster. Trustee will likely argue that an expensive summer camp is unreasonable, as sending the kids there is being done at the expense of the creditors. Issues with Keeping Rental Property. High-income debtors are much more likely to have investment real estate in addition to their homes. In such cases, there is an issue as to whether keeping the rental property is reasonable. If the expenses of retaining the property exceed the amount of rental income, then keeping the property will result in a reduced amount of disposable income.
In such a case, the U. Trustee will argue that the debtor will have additional income each month to make payments to creditors if the investment property is abandoned. A high-income debtor is much more likely to have an expensive home.
However, there are some cases across the country in which the U. Trustee argued that it is unreasonable for a debtor to keep a luxury home with a very high monthly mortgage at the expense of the creditors. This issue has not been addressed in our Circuit. If the debtor fails the means test or simply has too much disposable income, then there are still a number of options available. If the debt levels exceed these amounts, they can file for Chapter 11 relief.
Debt Negotiation is also an option in which the attorney can negotiate settlements with the creditors. I write this report from there on May 1, Many years ago I discovered how exciting it is to travel across the country to interact with fellow bankruptcy practitioners and learn the latest about strategies for protecting consumer bankruptcy debtors, and tips for running a bankruptcy law office.
What I find just as important is trading notes and war stories with other bankruptcy attorneys from across the country and learning about new products and services at the accompanying trade show.
New Trend in Interpreting the Means Test. There are three reasons for this trend. Apparently, the current recessionary climate and sentiment against large banking institutions is resulting in the U. Trustee bringing fewer Section motions alleging that the debtor filed an abusive case. In addition, more and more debtors are providing information to the U. This enables the U.
Trustee to evaluate the issue of abuse and reach a conclusion that the U. Finally, there seems to be a greater number of experienced bankruptcy attorneys who know what red flags to look out for and consequently these experienced attorneys refrain from filing abusive cases. Judicial salaries are relatively low. It appears that we are losing a large number of bankruptcy judges because the level of judicial pay is so low.
This was indeed the case just two three years ago here, in the Eastern District of New York. Our Chief Bankruptcy Judge for the district, Hon. Melanie L. Cyganowski, left the bench to pursue a much more profitable position as a partner in a leading bankruptcy firm.
On a positive note, however, a new law is going into effect on June 1, that, among other things, makes it illegal for a lender to discriminate against a bankruptcy debtor because he or she is in the HAMP program. The new law will also provide certain protections to Chapter 13 debtors as mortgagees will be precluded from objecting to discharge.
In addition, they gave out so much shwag that my ten-year-old son, Max , will be delighted to receive from me upon my return a large number of squeeze toys, flashlights, keychains, fancy chocolates, playing cards, puzzles, T-shirts and what-not that I picked up from these exhibitors. Emerging Technologies for Consumer Bankruptcy Practices.
One of the most crowded exhibitor booths belonged to a OTB, an company that created BK Express , a comprehensive practice management system which is designed for consumer bankruptcy attorneys. I previously wrote about special defenses that a homeowner can assert to defend a foreclosure action involving a MERS mortgage. If your client has a MERS mortgage, consider looking at the pooling and service agreement to make sure that there was a true and valid assignment at every link of the chain, including delivery and acceptance of assignment documents.
If there was not, you may have a good objection to a MERS proof of claim or motion to lift the stay. I was rather surprised the very small turn-out from our state.
Out of about 1, bankruptcy attorneys who attended the convention, there must have been fewer than 20 from New York, and only one other member, I believe, from the Suffolk County Bar Association. That was Allison Shields, who was actually one of the speakers — she spoke on managing a successful bankruptcy practice.
In my regular monthly column in the Suffolk Lawyer last month I discussed the difficulties that Congress created by enacting a means test statute that is poorly worded and confusing. Countering the Lopsided Results of the Means Test.
When you only look at a six-month period to project the next three to five years of income, you often get a lopsided result. The IRS allows you to deduct charitable contributions from your income when taking the bankruptcy Means Test.
Maximizing your charitable contributions will increase your chances of passing the bankruptcy Means Test. Keep your car if you have a car note. The bankruptcy Means Test allows debtors to deduct the payments they make on their vehicle.
So in this particular situation dumping your car payment might work against your desire to file Chapter 7 bankruptcy. Make sure you deduct your tax obligations. For those individuals that owe taxes at the end of the year, the bankruptcy Means Test allows them to deduct those obligations from their income which may pull their income below the median-income for their location, thus qualifying them for Chapter 7 bankruptcy.