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Recent Blog Posts
Keeping Your Vehicle by Reaffirming the Vehicle Loan
In a Chapter 7 case you “reaffirm” your vehicle loan if you want to keep your vehicle. This means you keep paying it.
Most debts that you owe are discharged in a Chapter 7 “straight bankruptcy.” That means that they are legally, permanently written off.
That includes your vehicle loan. But with a vehicle loan the lender has a lien on your vehicle. So if you don’t pay on it the lender has a right to take your vehicle. A Chapter 7 filing would usually just delay that by a few weeks.
So if you want to keep your vehicle, you have to voluntarily exclude the vehicle loan from the discharge of debts. You have to agree to reaffirm the debt.
The term makes sense. You originally agreed to pay the vehicle loan when you bought the vehicle. Then you file the bankruptcy case in which that loan would be discharged. But instead you reaffirm the loan obligation, saying you want to owe it after all, by excluding it from the discharge.
Timing Can Be Crucial for Passing the Means Test
With smart timing you can take advantage of the unusual way that your “income” is calculated for the Chapter 7 means test.
Passing the Means Test
We introduced the means test a couple of weeks ago and said that many people pass this test simply by having low enough income. Their income is no larger than the published median income for their state and family size.
We also explained that income for this purpose has an unusual definition. It includes:
- not just employment income but virtually all funds received from all sources—including from irregular ones like child and spousal support payments, insurance settlements, cash gifts from relatives, and unemployment benefits (but excluding Social Security);
- funds received ONLY during the 6 FULL CALENDAR months before the date of filing, multiplied by two for the annual amount.
A Simple Example of Passing the Means Test
We show by example how the means test works, when a person qualifies for a Chapter 7 case simply by income.
An Example is Worth a Thousand Words
You have to pass the means test to qualify for a Chapter 7 “straight bankruptcy. In a recent blog post we said that the easiest way to pass the means test is by your income. If your income is low enough you pass without having to look at your allowed expenses or special circumstances. Let’s see how this works by way of an example.
Our Example—The Facts
Jeremy and Allison need bankruptcy relief. Their bankruptcy lawyer has recommended that they file a Chapter 7 case based on their circumstances. They have decided to do so.
They are both employed and get paychecks twice a month, on the 1st and 15th of the month. Jeremy has a gross income of $2,750 per month and Allison $3,250 per month.
Household Size Really Matters for Passing the Means Test
You can have more income for the purpose of passing the means test as your household size increases. But what IS your household’s size?
Household Size in the Means Test
When introducing the means test a week ago we showed how passing that test often depends on your income. You start by comparing your income to the median income amount for your family size in your state. As your family size increases you can have more income and still pass the means test.
For many people the size of their household is obvious. But not for everybody. Today’s blog post gets into how to figure out the size of your household when it isn’t obvious.
Where to Find the Definition of Household
The federal Bankruptcy Code does not provide a definition of household or how to determine its size.
The U.S. Trustee points us in the right direction. (That’s part of the U.S. Department of Justice which Congress tasked with enforcing the means test.) The U.S. Trustee has put out a “Statement of the U.S. Trustee’s Position on Legal Issues Arising under the Chapter 7 Means Test.” This Statement states:
No Means Test If You Fit within a Military Exemption
There are two military-related exemptions from the Chapter 7 means test. They are narrow but if you qualify that can be a major advantage.
The Benefit of Avoiding the Means Test
We introduced the “means test” two blog posts ago. This test determines whether you qualify for a Chapter 7 “straight bankruptcy” or instead must do a Chapter 13 “adjustment of debts” case. It’s based on your income, or if your income is not low enough your expenses play a part as well.
Although most people who want to file under Chapter 7 could pass the means test, not everybody could. For them being able to skip the means test can be a very big deal. A Chapter 13 case requires you to pay your debts to the extent your budget allows for a period of 3 to 5 years. In great contrast, a Chapter 7 case usually “discharges” (legally writes off) most debts without you paying anything. And the cases usually only last about 4 months.
No Means Test If You Have More Business Debts than Consumer Debts
You only have to pass the means test if you have "primarily consumer debts." If you have more business debts, skip the means test.
The Consumer “Means Test”
Our last blog post introduced the “means test.” It’s used to see if you qualifying for Chapter 7 “straight bankruptcy.” If you don’t qualify, you may instead have to file a Chapter 13 “adjustment of debts” case requiring a 3-to-5-year payment plan.
But the means test only applies to consumer bankruptcy cases. Otherwise you can skip the means test.
The official Voluntary Petition for Individuals Filing Bankruptcy form asks the following two questions:
16a. Are your debts primarily consumer debts? Consumer debts are defined in 11 U.S.C. § 101(8) as “incurred by an individual primarily for a personal, family, or household purpose.”
The Chapter 7 Means Test
You have to pass the means test to qualify for a Chapter 7 case. It’s often an easy test to pass but one with some crucial twists and turns.
The Purpose of the “Means Test”
You need to qualify to file a Chapter 7 “straight bankruptcy” case. The “means test” is the main step in qualifying. Its purpose is to not let you file a Chapter 7 case if you have the “means” to pay a meaningful amount to your creditors. If you do, then usually you would instead have to go through a Chapter 13 “adjustment of debts” case.
A consumer Chapter 7 case generally “discharges” (legally writes off) all or most of your debts. And it does so in a process that usually takes only 3 or 4 months.
In contrast a Chapter 13 case requires you to pay as much as you can reasonably pay to your creditors over a 3 to 5 year period. That usually means that under Chapter 13 your creditors get paid at least a portion of what you owe them. Often that portion is small, and sometimes most of your creditors actually get nothing. But the point is that Chapter 7 is SO much faster and easier. IF it’s the right option for you, you want to be able to qualify. And that means passing the means test.
Example of a Simple Chapter 7 "Asset Case"
Chapter 7 “asset” cases may sound scary. They needn’t be. We walk you through a very straightforward example to demystify this.
Asset and No-Asset Chapter 7 Cases
Our last blog post discussed the difference between a no-asset and asset Chapter 7 case. Simply put, in a no-asset case everything you own is covered and protected by available property exemptions. So your trustee takes nothing from you. In contrast, in an asset case, something you own is not covered by a property exemption. So the trustee takes it, sells (“liquidates”) it, and distributes the proceeds to your creditors.
We ended our last blog post with a short example of what happens in an asset case if you happen to owe certain kinds of debt that you’d still have to pay after bankruptcy, such as accrued child support or recent income taxes. The Chapter 7 trustee pays such special “priority” debts in full before paying anything on ordinary debts. That way most of your asset proceeds go to a debt that you have to pay anyway.
A Chapter 7 "Asset Case"
Most Chapter 7 cases are “no-asset” ones. So, what’s an “asset case,” and is it good or bad for you?
The More Common No-Asset Case
The Chapter 7 bankruptcy option is sometimes confusingly called “liquidation” bankruptcy. That implies that something you own gets “liquidated”—sold. But in most consumer Chapter 7 cases that’s not what happens.
Under Chapter 7 you get a discharge (legal write-off) of most or all of your debts you want to discharged. In return only those things that you own, IF ANY, that do NOT fit within a set of property exemptions must be turned over to your bankruptcy trustee, who then sells them and distributes the proceeds to your creditors.
The reality is that in most Chapter 7 cases everything DOES fit within the set of applicable property exemptions. So most consumer debtors do NOT turn ANYTHING over to the trustee, and get to keep everything. Nothing is actually “liquidated.” Because the trustee takes no assets for distribution to the creditors, this is called a “no asset” case.
Chapter 7 Trustee's Abandonment of Property
Just because you own something that’s not exempt doesn’t always mean that the Chapter 7 trustee will take it. The trustee could abandon it.
Our last blog post discussed factors that a trustee would consider in deciding whether to liquidate one of your assets. In most consumer Chapter 7 cases the trustee liquidates nothing because everything the debtor owns is “exempt,” or protected. That’s called a “no asset” case because the trustee does not claim anything for the “bankruptcy estate.”
The trustee can get interested in something a debtor owns only if it is not exempt—not protected. But even when something isn’t exempt, the trustee may still decide it’s not worth liquidating. If that’s the trustee’s decision, he or she could then “abandon” the property.
Reasons to Abandon
The United States Bankruptcy Code says that
the trustee may abandon any property of the [bankruptcy] estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate.
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