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Recent Blog Posts
The New Median Income Amounts for the Chapter 7 "Means Test"
Besides the many 3-year cost of living increases happening on April 1, 2016, new median income amounts also start applying on the same day.
Last week we finished a series of about a dozen blog posts related to an every-3-year cost of living adjustment of many of the dollar amounts that are within the bankruptcy statutes. Because inflation during the last few years has been relatively low, these dollar amount increases were modest. (See this notice in the Federal Register.) But they are still important because on the margins they can affect everything from whether you can qualify for bankruptcy, what assets you can keep, what debts you can “discharge” (write off), and how long your case will last. All these changes apply to bankruptcy cases that are filed on or after April 1, 2016.
Besides these every-3-year adjustments, bankruptcy law requires separate cost of living adjustments of the median family income amounts for each state and family size. (See Section 101(39A) of the Bankruptcy Code.) The next one of these median family income adjustments happens also on April 1, 2016. This is the topic of today’s blog post.
The Military Exemptions from the Chapter 7 "Means Test"
You qualify for Chapter 7 without having to pass the “means test” if you fit within these very specific military-related exemptions.
Short Introduction to the “Means Test”
The “means test” determines whether you have enough income after your expenses to pay a meaningful amount back to your creditors. If you do, you don’t pass the “means test” and you don’t qualify for Chapter 7 “straight bankruptcy.”
But like many people who want to file a Chapter 7 case, you may easily pass this test simply by having low enough income. As long as your income is no more than the current published “median income” amounts for their state and family size (as being updated on April 1, 2016), you don’t have to consider the amount of your expenses—you automatically qualify for Chapter 7.
The Business Debt Exemption from the Chapter 7 "Means Test"
If your debts are not "primarily consumer debts" then you may be able to qualify for Chapter 7 bankruptcy much more easily.
Last week we had a blog post about an adjustment in the “means test” that is used for qualifying for Chapter 7 “straight bankruptcy. We mentioned that you’re exempt from needing to take and pass the “means test” under two circumstances:
- if your debts are primarily business debts instead of consumer debts
- if you fall into one of several military service categories
We’ll cover the first of these exemptions today, and the second one in our next blog post.
The Purpose of the Means Test
The “means test” is intended to not allow you to go through a Chapter 7 case if you have the “means” to pay a meaningful amount of money back to your creditors. If your income is more than the “median income” for your family size in your state, you are required to go through a complicated formula to see if you do have sufficient “means.” If you are considered to have the “means,” you are required to file a Chapter 13 case instead, paying all you can afford to your creditors for 3 to 5 years.
You're Now More Likely to Be Paid More Back Wages by Your Bankrupt Former Employer
Here’s an adjustment in the law that can benefit you if you are owed wages and/or benefits by a person or business filing bankruptcy.
This is the last of a series of blog posts on the effect of changes going into effect on April 1, 2016. These changes are a result of a cost of living adjustment that’s in the federal bankruptcy law. See Section 104(b) of the Bankruptcy Code.
Every one of these blog posts so far have been about these changes would affect you if you were filing a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts.” But today’s blog post assumes you’re on the other side of the table, that you are owed money—in the form of back wages and employee benefits—by a former employer that filed bankruptcy.
In this situation you are a creditor of the person or business owing you the wages and/or benefits. But the good news is that you are a creditor who the law treats relatively well. Plus the April 1 cost of living adjustment means that such debts for wages and/or benefits are going to be treated even slightly better.
Larger Families More Likely to Qualify for Shorter Chapter 13 Cases
Soon families of larger than 4 people can have a bit more income and qualify for a 3-year Chapter 13 payment plan instead of a 5-year one.
How could it be that larger families can have shorter Chapter 13 “adjustment of debts” cases?
The reason is that on April 1, 2016—as happens every 3 years—there will be a modest increase in the “median family income” calculation for “a debtor in a household exceeding 4 individuals.” This matters because whether your Chapter 13 case can last 3 years or instead must go for 5 years depends whether your “current monthly income” is more than the published “median family income” amounts for your size of family in your state.
If your “current monthly income” is not more than the published “median family income” then your Chapter 13 case is not required to go longer than 3 years. If it is more, then your case is required to go 5 years.
A Chapter 13 Debt Limit Increase
As of April 1, 2016 you can have a little more debt and still qualify for a Chapter 13 "adjustment of debts."
Why Debt Limits in Chapter 13?
You can have an unlimited amount of debt when you file a Chapter 7 “straight bankruptcy.” However, there are debt limits when filing a Chapter 13 “adjustment of debts for an individual with regular income.” How come the difference?
Chapter 7 is relatively straightforward, and in most consumer cases is done in only 3 or 4 months. There is a quick determination whether everything the debtor owns is “exempt”—protected from the creditors. If everything is, then the bankruptcy trustee declares the case to be a “no asset” one, nothing is liquidated, and the debts that can be discharged (legally written off) are discharged and the case is closed.
Chapter 13 is much more complicated. It involves a court-approved payment plan usually lasting 3 to 5 years. An intricate set of rules determine how different kinds of creditors are paid (or the extent to which they’re not paid). Those rules contain many advantages for debtors not available under Chapter 7 for dealing with their home mortgages, vehicle loans, child and spousal support, income tax liens, student loans, co-signed debts, loans secured by personal property, recent income taxes, unprotected (“non-exempt”) assets, and more.
A Chapter 7 "Means Test" Calculation Adjustment
As of April 1, 2016 you can have a little more "disposable income" and still pass the "means test" to qualify for Chapter 7 bankruptcy.
Means Test
The “means test” determines whether you have enough income after your expenses (that is, enough “disposable income”) to repay your creditors a certain amount. If you don’t have enough disposable income, then you qualify for Chapter 7“straight bankruptcy.” Otherwise you must instead deal with your debts through a Chapter 13 “adjustment of debts” case.
Chapter 7 allows you to discharge (legally write off) all eligible debts in a process taking 4 months or so. In contrast Chapter 13 requires you to pay debts as much as you can afford to in a payment plan lasting usually 3 to 5 years. Chapter 13 may give you some significant advantages over Chapter 7. But in many other situations being able to discharge debts in a matter of a few months makes Chapter 7 the much preferred option.
The Maximum IRA Exemption
Most pensions and other retirement funds are “exempt”—completely protected when you file bankruptcy. But there’s an exemption cap for IRAs.
Property Exemptions
When you file a Chapter 7 “straight bankruptcy” case usually you are able to keep everything you own because of property “exemptions.” These are usually categories and amounts of assets that people are allowed to keep, and their creditors and the bankruptcy trustee are not allowed to take. For example, there are homestead exemptions for your home, vehicle exemptions for your vehicle(s), and usually many other categories.
The intent behind exemptions is that you can’t really get a fresh financial start if you have to give everything to your creditors. So the exemptions protect a basic set of assets. Depending on where you live and what assets you own, you have a right to exemptions through your state’s laws and possibly also through federal laws.
New Thresholds for a "Luxury" Purchase or Cash Advance to Be Presumed Fraudulent
Creditors will be a little less likely to challenge the writing off of recent uses of credit.
As of April 1, 2016 creditors will have slightly harder time showing that recent credit purchases or cash advances were fraudulent and so can’t be written off (“discharged”) in bankruptcy. That’s because to qualify for a “presumption of fraud,” creditors will need to have a higher dollar amount threshold before that presumption kicks in. The “presumption of fraud” makes it easier for a creditor to object to the discharge of a debt. With the new higher threshold, the “presumption” will not kick in quite as often, to the benefit of consumers filing bankruptcy.
If you’ve made credit purchases or cash advances in the last few months and are considering bankruptcy, this may benefit you.
Discharge of Debts in Bankruptcy
When you file bankruptcy most kinds of debts are discharged so that you never have to pay them. But certain select debts are never discharged—such as past-due child support. And some kinds of debts are discharged unless the creditor objects to the discharge and persuades the bankruptcy court that certain conditions are met so that discharge is not legally appropriate.
Upcoming Increase in Federal Property Exemptions
The federal exemptions are nudging up about 3%. But that only matters if you are allowed to use them, and are higher than your state ones.
States with Access to the Federal Exemptions
This blog post is not for everyone. It’s only for the residents of 19 states—Alaska, Arkansas, Connecticut, Hawaii, Kentucky, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Texas, Vermont, Washington, and Wisconsin, and the District of Columbia. It’s also for anybody who’s moved within the last 2 years from any of these places.
What makes these residents special is that they have the option of using a set of federal property exemptions to protect their assets when filing bankruptcy (instead of their state exemptions). And those federal exemptions are nudging higher as of April 1, 2016.
What Makes These States So Special?
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