Articles Posted in The Means Test

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.

Recently, the U.S. House of Representatives voted to pass the The National Guard and Reservist Debt Relief Act of 2011 (H.R.2192). This bill is an extension of a 2008 version of the bill with the same name. The currently existing law helps soldiers qualify for Chapter 7 bankruptcy by allowing those on active duty to bypass the means test.

Soldiers would more easily qualify for a Chapter 7, because they can now bypass the means test. The means test requires the court to look at the debtor’s income and compare it to an average income for the same family size. If the debtor’s income is above average, then the filing a Chapter 7 is presumed a fraudulent abuse of the system as the debtor makes too much money to not pay any debts back. The debtor presumed fraudulent can then either file a Chapter 13 bankruptcy or pursue a non-bankruptcy option. The National Guard and Reservist Debt Relief Act of 2008 dictates that those in active duty for at least 90 days do not have to overcome any fraud analysis. They automatically qualify for a Chapter 7 regardless of how high their income is.

The justification behind the bill is that oftentimes these soldiers are called upon on short notice, requiring them to leave higher paying jobs to travel to remote locales to defend America. This may lead to soldiers having to maintain more than one household. Again, to qualify under this bill, reserve members must have been on active duty for 90 days or more since September 11, 2011. You can also qualify during the 540 days following activation.

Though few Jacksonville bankruptcy filers make a million dollars a year, it is still possible for such a debtor to get a discharge in a Chapter 7 liquidation bankruptcy. In 2005 Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) which instituted all sorts of hoops debtors now have to jump through to successfully file a Chapter 7 bankruptcy. The most common “hoop” is known as the “Means Test“.

The Means Test requires under 11 U.S.C. § 707(b) that a debtor whose debts are primarily consumer show that their gross income is less than the average gross income for their family size in their geographic region. Let me say that again in English, “If your debts are mostly from non-business transactions you have to prove to the court that you, your spouse and one kid make less than the average married couple with one kid in Jacksonville.” Most people skip over the first part of this paragraph and focus on the income and family size. However, if you can show that your debts are primarily non-consumer or “Business related” debts you can bypass the means test altogether. For example, if you make $1,000,000 a year and you are a family size of one, you far exceed the median income as stated by the IRS, but if you can show that your debts are more business than consumer, you can file Chapter 7 anyway.

This loophole was put into place by Congress to encourage businesses. We’ve all heard stories of a large percentage of small business failing within their first year. Apparently Congress heard this too and decided to allow business debtors to file Chapter 7 instead of forcing them into a long, costly Chapter 13 to encourage people to take risks and open businesses. Whether it is actually good for the economy is up for debate, but Congress thought so, so we now have the 11 U.S.C. § 707(b) exception to the means test.

The Jacksonville Bankruptcy court is part of the Middle District and a Middle District Court ruled on October 11, 2011 that Social Security benefits need not be included in either the Means Test or in the disposable monthly income (DMI) paid to unsecured creditors in a Chapter 13.

To quote the Honorable Judge Steele:
“Therefore, a Chapter 13 plan need not provide that social security benefits be included as projected disposable income which will be applied to payments for unsecured creditors.” See Vandenbosch v. Waage

Now we know that Social Security funds will not be used in calculating Chapter 13 payments, but what about cases that have already been filed? Judge Steele stated in his opinion that these benefits, “need not… be included as projected disposable income”. I would analyze this to say that they can be included if the debtor desires or needs to use the funds to show that they can fund a plan to overcome the “Good Faith” requirement of Chapter 13, but that the debtor cannot be required to use these funds if the debtor chooses not to.

What is yet to be seen is whether we can reduce payments on already confirmed plans that contemplated including the social security as income on Form B22C (Means Test). The court requires that a plan be modified if there is a, “change of circumstances” as to income. Historically, this meant an increase or decrease of income, not a reclassification of what income means. I take the position that this is a change of circumstances sufficient to justify a modification, though we will have to wait and see.
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For those of you who don’t know, a Chapter 13 requires you to make payments to your creditors, typically from 3 to 5 years. What most people don’t know is that there are two different payoff schemes in a Chapter 13, the Disposable Monthly Income (DMI) plan and the 100% plan. Which plan you get depends on the facts of the situation but it basically works as follows:

In a DMI plan, your monthly payment to the trustee for unsecured creditors is calculated based on your monthly income minus the established by the IRS reasonable and necessary living expenses allocated to your family size. The idea is that you get to keep enough money to live, which is important, but that any money you earn in excess of living must be paid to your creditors. This is the more difficult plan to succeed in, as it requires you to go a number of years living off of the IRS standard, which requires a strict budget. This plan cannot get paid off early unless it’s first transformed into a 100% plan, which would only happen if you had a significant increase in income.

In a 100% plan, your monthly payment to the trustee is calculated based on your total debt rather than your monthly income. We add all of your debts together, add 10% to pay the trustee (see how the bankruptcy trustee gets paid), and divide the total by the number of months you need to pay (typically 60 months/5 years). This payment is less than what your DMI payment would be. If the payment is higher, then you should be a DMI plan instead of a 100% plan. Since you’re paying 100% of your debts in this plan, you can pay off your bankruptcy early.

When in a Chapter 13 bankruptcy you have an ongoing obligation to report any increase or decrease in your gross income. You also must annually provide a copy of your tax return to the trustee. Changes in your income will require recalculation of your plan, which can increase or decrease your plan payment. Changes in your income can also mean the difference between your being a DMI plan and a 100% plan.
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With few exceptions, qualifying for a Chapter 7 Bankruptcy requires a debtor to show that their household income is less than the median household income for the same family size in their region. These amounts are updated and changed each year by the IRS. In Florida the numbers currently are as follows:

*For each additional member beyond 4, add $7,500.

Marriage may be a blessed arrangement that brings us together, but with financial problems being one of the most common reasons for divorce, it makes sense to try and clear up any of those issues from earlier in your life before tying the knot.

When BAPCPA (the Bankruptcy abuse prevention and consumer protection act) passed in 2005, new requirements were imposed on debtors wanting to qualify for Chapter 7 bankruptcy. One of those requirements was 11 USC 707(b) or the “means test”. 707(b) requires a debtor to show that their gross income for their family size is less than the median income for a family of the same size in their geographic region. These median income charts are made available through the IRS and are updated annually.

Generally, if a debtor’s household income for their family size is higher than the median, that person is not eligible for a Chapter 7 (liquidation) bankruptcy and must instead file a Chapter 13 (reorganization) bankruptcy. Defining income is usually not difficult, the IRS defines gross income under 26 USC 61, and most everyone has had experience with it as we’ve almost all paid our taxes based on it.