Category Archives: means test

Decoding the Chapter 7 Means Test

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Introduction:

When considering Chapter 7 bankruptcy, understanding the means test is essential. The means test helps determine eligibility by comparing your income to the median income in your state. This article provides a comprehensive guide to help you understand how the Chapter 7 means test works and its significance in the bankruptcy process.

  1. Purpose of the Means Test: The means test was introduced as part of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) to prevent abuse of Chapter 7 bankruptcy by individuals with higher incomes. Its primary purpose is to ensure that those who have the means to repay some of their debts are directed towards Chapter 13 bankruptcy instead.
  2. Calculating Median Income: To begin the means test, you must determine your household’s current monthly income. This includes income from all sources, such as employment, self-employment, rental properties, and retirement benefits. Next, compare your income to the median income for a household of the same size in your state. The median income figures are regularly updated and can be obtained from the U.S. Trustee Program’s website or your local bankruptcy court.
  3. If Your Income Is Below the Median: If your income falls below the median income for your state, you automatically pass the means test and are eligible to file for Chapter 7 bankruptcy without further scrutiny. However, it’s important to note that passing the means test doesn’t guarantee approval, as other factors will be considered during the bankruptcy process.
  4. If Your Income Is Above the Median: If your income exceeds the median income, you’ll need to proceed with the second part of the means test, which analyzes your disposable income. This calculation deducts specific allowable expenses from your current monthly income to determine the amount available for debt repayment.
  5. Deducting Allowable Expenses: The means test allows deductions for certain standardized expenses based on predetermined guidelines. The remaining income after deducting allowable expenses represents your disposable income.
  6. Disposable Income and Chapter 7 Eligibility: The amount of disposable income you have plays a significant role in determining your eligibility for Chapter 7 bankruptcy. If your disposable income falls below a certain threshold, you are likely to qualify for Chapter 7. However, if your disposable income exceeds the threshold, you may be required to file for Chapter 13 bankruptcy, which involves a repayment plan based on your income and debts.
  7. Seeking Professional Guidance: Navigating the means test and its complexities can be challenging. It is highly recommended to consult with a qualified bankruptcy attorney who can provide personalized advice based on your unique financial situation. They will help ensure accurate completion of the means test and guide you through the bankruptcy process.

Conclusion:

The Chapter 7 means test is a crucial component of determining eligibility for bankruptcy relief. Understanding how it works and its implications is vital when considering filing for Chapter 7 bankruptcy. By calculating your income, comparing it to the median income, deducting allowable expenses, and determining your disposable income, you can gain clarity on your eligibility. Remember, consulting with a knowledgeable bankruptcy attorney is crucial for accurate completion of the means test and obtaining the best possible outcome in your bankruptcy case.

Schedule a free telephone appointment to discuss your unique debt situation with attorney Jennifer Weil at my Setmore page.

Qualifying for Chapter 7 Bankruptcy: Understanding the Means Test

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If you’re struggling with debt, you may be considering filing for Chapter 7 bankruptcy. But how do you know if you qualify for this type of bankruptcy? The answer lies in something called the “means test.” In this blog post, we’ll explain how the means test works and what you need to do to qualify for Chapter 7 bankruptcy.

The first thing the means test looks at is your gross income over the past six calendar months. If your income is not more than the published median income for your state and family size, you don’t need to complete the rest of the means test. Many people qualify for Chapter 7 based on their income alone.

However, if your income is more than the median income number, you’ll need to complete the rest of the means test. This involves deducting certain expenses from your income, but you can’t deduct just any expense. The allowed deductions are based on a complicated set of rules, which can trip up many people.

Once you’ve deducted your allowed expenses, you’ll be left with your “monthly disposable income.” If your monthly disposable income is less than a certain number, you’ve passed the means test and can qualify for Chapter 7 bankruptcy. But if your monthly disposable income is more than another number, you won’t pass the means test.

It’s important to note that the means test is not a simple test, and there are many traps for the unwary. That’s why it’s best to work with an experienced bankruptcy attorney who can guide you through the process and help you avoid common pitfalls.

In summary, to qualify for Chapter 7 bankruptcy, you’ll need to pass the means test. This involves looking at your income over the past six months, deducting allowed expenses, and calculating your monthly disposable income. If your monthly disposable income is less than a certain number, you may qualify for Chapter 7 bankruptcy. However, the means test is a complicated process, so it’s important to work with an attorney who can help you navigate the process and achieve the best possible outcome.

Schedule a free telephone appointment to discuss your unique debt situation with attorney Jennifer Weil at my Setmore page.

Your Bankruptcy Consultation: The 3 Main Topics

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What happens at a bankruptcy consultation? The answer to this question is different depending on who the bankruptcy consultation is with, whether the consultation is in person or by phone, and what systems the bankruptcy attorney has set up for the consultation. I can give you some general insight as well as information about how I conduct my own bankruptcy consultations.

Consultation Fees

Many, but not all, bankruptcy attorneys do some sort of free consultation. The attorneys who don’t do free consultations aren’t necessarily more expensive; often, those attorneys feel that they are giving more value during the consultation phase, so they should charge a fee. Or they feel that they shouldn’t give away their time. There may be an incentive built into the consultation fee in the sense that the attorney may credit such a fee against the entire bankruptcy attorney fee if you hire them.

As of yet, I don’t charge bankruptcy consultation fees for the most part for a couple of reasons: First, I do all my bankruptcy consultations over a relatively short phone call and not in person. In-person consultations take up far more of my time and I always charge for those. This doesn’t mean that I do all my phone consultations for free. I may charge a small fee for other types of consultations, such as student-loan consultations, since I’m providing a lot of value during those sessions.

Second, I see the primary purpose of the bankruptcy phone consultation as determining whether your case is one that I am able to take. I ask enough questions to enable me to determine whether the case is one that I have the time for and whether it is of the type that I want to take. For example, if your primary reason for calling is to get help with keeping your home through a mortgage foreclosure, I’m probably not the lawyer for you, since I generally don’t like to take those cases. But I may have a good lawyer referral or two for you!

Discussing Your Situation

The facts of your particular financial situation will come up during the bankruptcy consultation. A variety of issues are relevant to your financial situation and to a potential bankruptcy case, the most basic of which are how much money you make and what kind of debts you would like to have discharged in bankruptcy.

Not by any stretch of the imagination are these the only two issues that will come into play in your bankruptcy case, but they are a good place to start. You should be psychologically prepared to answer all sorts of questions about your financial affairs that would be inappropriate in a social setting. Think about what you own that might have any resale value, how you incurred your debts, whether you are or have been involved in a business of any kind and with whom, whether your spouse has anything to say about you filing for bankruptcy, etc.

All the different factors that could possibly come into play regarding your financial situation are too numerous and varied to list here. Just remember that anything and everything impacting your overall financial situation is potentially relevant and don’t forget to bring it up with the bankruptcy attorney at some point.

Eligibility For Bankruptcy

One topic that’s relevant to every bankruptcy consultation is your eligibility for bankruptcy, which also ties into the question of which chapter you might file.

Sometimes, your financial goals might dictate which chapter you should file, such as saving a home from foreclosure, for example. But there’s also the question of which chapter you are eligible to file, if any.

During the bankruptcy consultation, the attorney might unearth information showing that you aren’t eligible for the chapter you had hoped to file, or that a different chapter of bankruptcy would be better for your situation. Or they might find that bankruptcy is a bad idea for you altogether.

If your gross (before tax) income is close to the line of eligibility, the attorney may want to run the means test for you. Running the means test is not simple or quick and you should expect to pay a fee for this process. In my practice, I roll this fee into the bankruptcy, if the client hires me to file their case.

Call to schedule a free telephone bankruptcy consultation with attorney Jennifer Weil at (201) 676-0722.

How To Kick Start The Bankruptcy Process

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(Note: This is an update of a post from 2010 that many people found useful in beginning the bankruptcy process.)

How do you kick start the bankruptcy process? Most people want to get their bankruptcy case done as quickly as possible. To start, your bankruptcy attorney will ask you for a list of documents and information. It would help move things along faster if you knew what to gather right away.

Here’s a list of items to gather for your bankruptcy attorney:

1. Your last 6 months’ worth of pay stubs or other proof of income;

2. The details of your last bankruptcy filing, if any, including the date, place, and chapter of filing and the case number;

3. Gather your last 3 to 6 months’ of bank statements from all accounts, including checking, savings, retirement, CDs, IRAs, investment accounts, money market accounts, etc.;

4. Get a copy of your TransUnion credit report from www.annualcreditreport.com;

5. Gather all the collection letters that you have received in the past few months;

6. Gather all the bills that you are behind in paying that do not show up on your credit report;

7. Gather basic information on these types of debt (if you still owe them, even if you’re current on payments): Student loans, back taxes, alimony, child support, criminal fines and restitution; debts resulting from fraud; and divorce or property settlement debt;

8. Gather information regarding any cash advances or balance transfers you had in the past few months;

9. Get a copy of last year’s tax return or tax transcript;

10. Gather information on all of your most valuable property;

11. If your last year’s tax filing is overdue, file that return so the amount you owe or the refund you are owed can be determined;

12. If you own real property, gather the deed and mortgage and home equity loan papers;

13. If you have a car, get the last lease or financing bill for that car, if you’re still paying on it;

14. If you have any secured debt, gather the papers relating to it;

15. Copy your picture ID and your Social Security card or other proof of your Social Security number;

Remember, disclosure is a key to a successful bankruptcy case. If you don’t disclose, you may not get all the exemptions to which you are entitled. Tell your bankruptcy lawyer everything about your financial situation, especially if you borrowed money from a relative.

If you are in New Jersey and considering bankruptcy, please call Jennifer Weil to schedule a free telephone consultation on my Setmore site or at 201-676-0722.

When Chapter 7s Are Not So Simple

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The goal of most Chapter 7 cases is to get in and get out—file the petition, go to a hearing with your attorney a month later, and two months after the hearing, your debts get written off. Mission accomplished, end of story. And usually that’s how it goes. What are some reasons that a Chapter 7 case doesn’t go that way?

Four main kinds of problems can happen:

Income

Under the “means test,” if you made or received too much money in the 6 full calendar months before your Chapter 7 case is filed, you can be disqualified from Chapter 7. As a result, you can be forced into a 3-to-5 year Chapter 13 case, or have your case be dismissed altogether. These results can be avoided by careful timing of your case filing, or by making changes to your income beforehand, or by a proactive filing under Chapter 13.

Assets

In Chapter 7, if you have an asset that is not “exempt” (protected), the Chapter 7 trustee will be entitled to take and sell that asset, and pay the proceeds to your creditors. You might be happy to surrender a particular asset you don’t need in return for the discharge of your debts, in particular if the trustee is going use the proceeds in part to pay a debt that you want paid, such as a child support arrearage or an income tax obligation. But you may not want to surrender that asset, either because you think it is worth less than the trustee thinks or because you believe it fits within an exemption. Or you may simply want to pay off the trustee for the privilege of keeping that asset. In all these “asset” scenarios, there are complications not present in an undisputed “no asset” case.

Creditor Challenges to Discharge of a Debt

Creditors have the limited right to raise objections to the discharge of their individual debts, on grounds such as fraud, misrepresentation, theft, intentional injury to person or property, and similar bad acts. In most circumstances, the creditor must raise such objections within about three months of the filing of your Chapter 7 case. So once that deadline passes you no longer need to worry about this, as long as that creditor got appropriate notice of your case.

Trustee Challenges to Discharge of Any Debts

If you do not disclose all your assets or fail to answer other questions accurately, either in writing or orally at the hearing with the trustee, or if you fail to cooperate with the trustee’s investigation of your financial circumstances, you could lose the ability to discharge any of your debts. The bankruptcy system relies on the honesty and accuracy of debtors. So the system is quite harsh toward those who abuse the system by trying to hide things.

To repeat: most of the time, Chapter 7s are straightforward. That’s especially true if you have been completely honest and thorough with your attorney during your meetings and through the information and documents you’ve provided. In Chapter 7 cases that I do for my clients, my job is to have those cases run smoothly. I do that by carefully reviewing my clients’ circumstances to make sure that there is nothing troublesome, and if there is, to address it in advance in the best way possible. That way we will have a smooth case, or at least my clients will know in advance the risks involved. So, be honest and thorough with your attorney, to increase the odds of having a simple Chapter 7 case.

Discuss your financial situation with bankruptcy attorney Jennifer N. Weil by scheduling a phone appointment at (201) 676-0722 or by emailing weilattorney@gmail.com.

2 Ways to Use Bankruptcy To Close Your Business

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2 ways to use bankruptcy to close your business involves leaving your business debt behind so that it does not come back to haunt you personally.

Closing down a business can be messy. Business bankruptcy is often more complicated than a regular bankruptcy case. But in one way, a business bankruptcy may be easier than a consumer bankruptcy case.

If you’ve owned a small business that you have shut down, or that you are about to shut down, you may be afraid of filing bankruptcy because you’ve heard that “business bankruptcies” are expensive and not a good way to wrap up the affairs of a business. However, bankruptcy can be a simple and effective solution.

The Means Test

The “means test” determines whether you may file a regular Chapter 7 case to discharge your debts in a few months, or whether you must file a 3-to-5-year Chapter 13 repayment case. Unless you need some of the other benefits of Chapter 13, many people prefer Chapter 7 because it gets them a fresh start more quickly and cheaply.

In some situations, a former business owner cannot pass the means test and will be required to go through Chapter 13. For example:

    • If, after closing her business, a business owner got a good job before filing bankruptcy, the income from that job may be higher than the “median income” applicable to her state and family size. So she may not pass the “means test.”
    • If the business was operated by one spouse while the other worked an outside job and earned a high income, the other spouse’s income may bump the couple above the “median income” with the result of not passing the “means test.”

But here’s the good news for some former business owners: the “means test” only applies if your “debts are primarily consumer debts.” (See Section 707(b)(1) of the Bankruptcy Code.) So if your debts are primarily business debts—more than 50%–you essentially can skip the “means test.”

Be careful here, because “debts” means all debts, including home mortgages and personal vehicle loans. So your business debts may have to be high to be more than all your consumer debts.

To apply this law, we must be clear about the difference between these two types of debts. What’s a “consumer debt”? The definition may sound familiar: it’s a “debt incurred by an individual primarily for a personal, family, or household purpose.” (Section 101(8).)  For example, if you took out a second mortgage on your home a few years ago to fund your business, the current balance on that second mortgage may not be a consumer debt.

Sometimes the line between consumer and non-consumer debt is not clear, so this is something you need to discuss thoroughly with your attorney if you want to avoid the “means test” under this “primarily business debts” exception.

If you have questions about qualifying for bankruptcy, call to schedule a free telephone appointment with Jennifer N. Weil, Esq. to discuss your situation at (201) 676-0722 or by emailing weilattorney@gmail.com.

Why Bankruptcy Means Test Timing Is Critical

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Waiting just one day to file your Chapter 7 bankruptcy case can make qualifying for it much easier—or much harder!

How could a small delay make such a big difference?

One of the goals behind the change in bankruptcy law in 2005 was to force more people to pay a portion of their debts through Chapter 13 payment plans instead of writing them off in Chapter 7 “straight bankruptcy.” And the primary tool for this is the means test. The rationale behind the means test was to have a financial test that would find out who had the “means” to pay something to their creditors in Chapter 13.

But rules can have unintended consequences. An experienced lawyer will work to turn these consequences to your advantage.

Why bankruptcy means test timing is critical

The means test compares the income you received during the six FULL CALENDAR months before filing bankruptcy to the median income for your state and family size. If your income is at or under the median income, then you can file a Chapter 7 (except in unusual circumstances, which I’m not going to get into here). If your income is higher than the median, you may be able to file a Chapter 7, but you have to jump through hoops to do so. And there’s a risk that you will be forced to go through a Chapter 13 payment plan.  Having income below the median income amount makes your case less risky.

But how can filing the case a day earlier or later matter so much? Because of the means test’s fixation on those six full calendar months. And because the means test includes ALL income during that period (other than Social Security).  All of the money that comes into your hands during that period is counted, not just taxable income.

Imagine that you received a chunk of money, say a tax refund, a few catch-up child support payments, or an insurance settlement or reimbursement.  Not a huge amount, say $3,000, received on July 15 of last year. Your only other income is from your job, where make a $42,000 salary, or $3,500 gross per month. Let’s say that the median annual income for your state and family size is $43,000 (this is just an example – the median income for New Jersey is much higher, thank goodness).

Now we’re getting close to the end of January, your Chapter 7 bankruptcy paperwork is ready to file, and you’re anxious to get it filed. BUT, if your case is filed on or before January 31, then the last six full calendar month period will be from July 1 through December 31 of last year, which includes that $3,000 you received in mid-July. Your work income of 6 times $3,500 equals $21,000, plus that $3,000 totals $24,000 received during that 6-month period. Multiply that by 2 to make that an annual amount, and that equals $48,000, higher than the $42,000 median income. So you’d have failed the income portion of the means test.

But if you just wait to file until February 1, the applicable 6-month period jumps forward by 1 month to the period from August 1 of last year through January 31 of this year. That new period does NOT include the $3,000 you received in mid-July. Now your income during the 6-month period is $21,000, multiplied by 2 is $42,000. You would be under the $43,000 median income. You’ve passed the income portion of the means test, and you can skip the awkward and risky expenses part of the means test. You’re more likely to breeze through your Chapter 7 case.

Last thing: what if that $3,000 was not received almost 6 months ago, but rather 2 or 3 months ago, and you’re desperate to file your case? You need to stop a garnishment or foreclosure and you can’t wait another few months to file. If you file now, you will be over the median income, and you will need to do the expenses part of the means test. You may be OK there. But careful pre-bankruptcy planning is critical. The sooner we start, the more likely time will be on your side.

Are you eligible for Ch. 7 or Ch. 13 bankruptcy?

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Eligibility for Ch. 7 or Ch. 13 bankruptcy can turn on who is filing the bankruptcy, the type and amount of debt, the amount of income, and the amount of expenses.

Who is filing the bankruptcy:

Only a human being (or a human being and his or her spouse) can file a Chapter 13 case. Neither a partnership nor a corporation can file a Chapter 13 case, but it can file a Chapter 7, whether or not the business owner also files one individually.

The type and amount of debt:

If your debt is primarily consumer debt (a dollar amount of more than 50%), then you have to pass the means test to qualify for a Chapter 7. Under Chapter 7, there is no restriction on the amount of debt you can have in order to qualify. But, Chapter 13 is restricted to cases where the person filing has a maximum of $383,175 in total unsecured debt and $1,149,525 in total secured debt.

Amount of income:

If your income is no more than the median income for your family size and state, then you can easily pass the means test to qualify for a Ch. 7. Chapter 13 requires regular income, which the Bankruptcy Code defines as income that is “sufficiently stable and regular” to enable you to “make payments under a [Chapter 13] plan.” This makes sense because you will be making regular monthly payments for the duration of your Ch. 13 case. A Ch. 13 case will last three years if the income is less than the median income applicable to your family size and state; if the income is at the applicable median income amount or more, the Ch. 13 case will last five years.

The amount of expenses:

In Ch. 7, if your income is not below the median for your state, then you must complete a highly technical test involving some, but not necessarily all, of your expenses to see whether you pass the means test and thus whether you are eligible for a Ch. 7. In Ch. 13, a similar, but often more complicated, calculation largely determines the amount you must pay monthly into your plan to satisfy the requirements of Ch. 13.

Choosing between Ch. 7 and 13 can be simple. But there are at least a dozen major differences among them, differences of which you may not be aware. So when you come in to see me or another attorney, be clear about your goals but also be open-minded about how to reach them. You may well have tools available that you didn’t know about.

For bankruptcy in Northern New Jersey, call: (201) 676-0722 or schedule a consultation at my Setmore page.

Business debt can allow you to qualify for Ch. 7

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If you owe more business/non-consumer debt than consumer debt, then you avoid not only the “means test” but also some other roadblocks to a successful post-business Chapter 7 bankruptcy case.

What’s the “Means Test” and Why Does It Matter?

Bankruptcy law says that if your income is more than a certain amount, you have to pass a means test to be able to go through a Chapter 7 case successfully. One way to avoid this means test is by having less income than the permitted median family income for the state in which you live. But the median family income amounts are relatively low. If your income is above the applicable median amount, you have to go through the entire means test at the risk of being forced into a 3-to-5-year Chapter 13 payment plan instead of a three-month Chapter 7 liquidation.

Debtors with More Non-Consumer Debts than Consumer Debts

You can skip the means test altogether if your debts are not primarily consumer debts. This way you could be eligible for a Chapter 7 case even if your income is above the median level. Indeed, you avoid other kinds of “presumptions of abuse” as well, not just the formulaic means test, but also the broader “totality of circumstances” challenges. Congress decided that if most of your debts are from a failed business venture, you should be allowed a fresh start through Chapter 7, regardless of your current income and expenses.

What is a “Consumer Debt”?

The Bankruptcy Code defines a “consumer debt” as one “incurred by an individual primarily for a personal, family, or household purpose.”

The focus is on the reason why you incurred the debt. If you made a credit purchase or took out the loan for your business, then it may not be a “consumer debt.” That is a factual question that must be decided separately for each one of your debts.

“Primarily Consumer Debts”?

The Bankruptcy Code does not make this crystal clear, but generally, if the total amount of consumer debt is less than the total amount of non-consumer debts, your debts are not primarily consumer debts. And then you do not have to mess with the means test.

Seemingly Consumer Debts May Not Be

Small business owners often finance the start-up and operation of their businesses with what would otherwise appear to be consumer credit—credit cards, home equity lines of credit and such. These may qualify as non-consumer debts in calculating whether you have primarily consumer debts. Your use of various forms of personal credit to fund your business is something to discuss with your attorney.

Unexpectedly High Business Debts Can Help

Sometimes business owners end up with business debts larger than they thought they would have when their business closed. For example, if you had to break a commercial lease when you closed your business, the unpaid lease payments you owe could be huge. Or your business closure may have left you with other unexpected debts, such as obligations to business partners or litigation resulting in damages owed. The good side of larger-than-expected business debts is that they may allow you to skip the means test and other grounds for dismissal or conversion to Chapter 13, allowing you to discharge your debts through Chapter 7.

For bankruptcy in Northern New Jersey, call: (201) 676-0722.

Variable income and the Chapter 7 means test

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In qualifying for a Chapter 7 bankruptcy, means testing is not an issue for people whose pay is below the median for their state and family size, but for those whose income is more, it can be a problem.

The means test is like a big IRS form with spaces for plugging in certain numbers and checking off boxes. If you’ve filed for bankruptcy in years past, you may not have seen it. The form was introduced as a result of the new bankruptcy legislation that Congress passed in 2005, which created more hoops for individual bankruptcy filers to jump through.

It has two main parts: The first determines whether your earnings are above or below median. The second is for those who are above median – it lets you take *certain* deductions from your income in an attempt to lower it to the point where you can qualify for a Chapter 7.

Obviously, it’s preferable not to have to fill out the second part of the Chapter 7 means test.

Those whose earnings vary during the year might be in a better position with regard to the means test than those with steady over-median earnings. Examples of people with variable pay over the course of a typical year include teachers, college professors, those who work solely or primarily on commission, and those who periodically claim unemployment insurance benefits because of temporary jobs or seasonal employment.

Many people credit their variable income for getting them into debt trouble to begin with, since they aren’t always able to afford their monthly payments steadily throughout the year.

How can earnings that vary over the year possibly be to your benefit? Because the means test only includes the earnings you received during the 6 months before your bankruptcy filing. If that prior 6 months encompasses a part of the year during which your income was lower, you have a better chance at your pay being below the median and qualifying for a Chapter 7.

So when considering the question of when you should file, think about filing soon after a period of lower income.

Photo by Anonymous9000.