Articles Posted in Chapter 7

When in 2005 Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), a flurry of people ran to file their cases before the changes occurred. Everyone had heard that the new law would make it impossible to file for Chapter 7 and that everyone would now be required to file Chapter 13 cases, making payments for five years. Well, Chapter 7 bankruptcy is still alive and well and the big change that was put into place is called, “The Means Test”. The Means Test requires the debtor to show that their income, based on their family size, is less than the average American in their area. It’s that simple. The problem debtors are having is that they don’t want to file Chapter 13 cases, where they have to pay a trustee their disposable income for five years, they want to file Chapter 7 cases where their case can be closed in five months with no payments made.

Congress thought that by forcing higher income debtors to file Chapter 13, creditors would get paid some of what they’re owed and creditors deserve to get paid what the debtor is able to pay. Fortunately for the many residents of Jacksonville, Florida who have heavily invested in rental properties, Congress thought of them as well. When BAPCPA was drafted someone realized the chilling effect a means test would have on small businesses and other small investors. Since only Chapters 7 and 11 are available to corporations, most small businesses would have to be liquidated in Chapter 7 or would have to pay the enormous cost of filing a Chapter 11. Small investors would be forced to file Chapter 13, which would prevent them from doing business for the five year period it took to complete their payment plan. These are the reasons why Congress created an exception to the means test for those individuals whose consumer debts make up less than half of their debt, i.e. if more than half of your debts are business, you can file Chapter 7 without taking the means test at all.

During the housing boom many residents of Jacksonville purchased homes to rent in speculation that their value would keep increasing. Instead, the market tanked to the point where nearly half of all homes owe more money on their mortgages than the homes are worth. Many of these people have higher incomes than average and wouldn’t be permitted to file under Chapter 7 due to the means test but because these properties were purchased as investments, they should all be able to bypass the means test and file Chapter 7 automatically.

The effect a raise will have on your Jacksonville Bankruptcy depends on which Chapter you’ve filed and the amount of the raise. “Material” is a term often referred to in the legal world. Prior to law school, I would have thought this had to do with fabric, but no, “Material” in the legal sense means, “Significant”. You may have heard the term, “Material Witness”. The same term can be used to describe a raise. Is the raise a big enough raise to have a “material” effect on the debtor’s income? If the answer is yes, then it may have an effect on your case.

With few exceptions qualifying for a Chapter 7 requires you to demonstrate that your income is less than the average American for your family size. This is called the, “Means Test”. To calculate your income, the last six months of your income is added up and multiplied by two. This gives a quasi-accurate report of what your income will be going forward. If your raise occurs after you’ve filed your Chapter 7 and you qualified on the date of filing, you’re case probably won’t be effected by the raise. That being said, there is a forward looking aspect to the “Means Test” which requires you to declare any anticipated changes in your income. If you know the raise is coming, you need to report it.

In a Chapter 13 case a raise has a very different effect. A Chapter 13 is a reorganization of your debt. Generally, secured creditors get paid in full and unsecured creditors get paid what’s left, your disposable income, if anything of your paycheck after paying living expenses and secured creditors. When you get a raise, the amount of money going to your unsecured creditors can increase because you have more disposable income. So, if you have unsecured creditors in a Chapter 13 who aren’t getting paid in full, you won’t see any money from your raise until your case is over because that increase in pay will go to the unsecured creditors. However, if your unsecured creditors are getting paid all of the money they’re owed, then an increase in income means that you’ll be able to pay everyone off sooner. Once everyone is paid in full, your case can be closed and you can get on with your life.

Jacksonville Bankruptcy Courts take into account who lives with you when you file bankruptcy and, depending on the chapter of bankruptcy you file, they may consider those people in different ways. I don’t mean to imply that the character of the people you live with matters. It makes no difference if you’re living with Tim Tebow or Timothy McVeigh. What matters is whether those living with you are dependent on you for most of their care and if they aren’t, the court wants to know if they make regular contributions to the household.

A regular contribution to the household is any payment of money to or on behalf of the person filing bankruptcy. A good example of this is when someone’s mother pays their phone bill every month. Their mother’s intent is to help them out a bit and have them call more frequently. By paying for that utility, it frees up more money for the debtor and so that debtor has more money to pay bills. A regular contribution from anyone counts, but most contributions come from people who live in the same home, such as boyfriends, girlfriends and roommates.

When figuring out which chapter of bankruptcy best suits your situation (if any), your lawyer should take your basic income information and preform a cursory, “Bankruptcy Means Test“. The Means Test was created by the U.S. Legislature in 2005 and requires that anyone wishing to file a Chapter 7 bankruptcy show that their income is lower than average for their family size than the average American household of the same size in their area. There are exceptions to this test for active military and some business holders, but generally this income test is required.