About Me
“ Craig D. Robins, Esq., has been a practicing Long Island bankruptcy attorney for over twenty-four years ”
Bankruptcy Means Test
Written by Craig D. Robins, Esq.When I sat down to write this month’s column for the Suffolk Lawyer, I was prepared to discuss several recent cases interpreting the means test. However, I could not get over the great number of splits of authority over almost every single issue.
The Means Test is the focal point of the drastic revisions that Congress made to the Bankruptcy Code in 2005. That was when the legislature thought it was necessary to tighten the existing bankruptcy law and make it more difficult for consumers to eliminate debt, especially for those who Congress thought could afford to pay something to their creditors.
Unfortunately for bench and bar, the statutory wording of the Code provisions underlying the means test is anything but clear and unambiguous.
Congress Failed in Drafting a Clear-Cut Means Test Statute
Ironically, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) was intended “to improve bankruptcy law and practice by restoring personal responsibility and integrity in the bankruptcy system and ensure that the system is fair for both debtors and creditors.”
Yet, when the new law was enacted in 2005, Bankruptcy scholars across the land declared that so many of the provisions of BAPCPA were so poorly worded that bankruptcy court judges would be perpetually perplexed as they tried to interpret them. They were right. The relatively new statute contains typos, sloppy choices of words, hanging paragraphs, and inconsistencies.
We now have bankruptcy courts, U.S. District Courts, and U.S. Courts of Appeal issuing decisions almost daily in an effort to make heads and tails over what Congress intended. The worst part? There are minority and majority views to almost every possible issue, and even a few hybrid views to boot.
Here’s more irony: BAPCPA was supposed to limit judicial discretion. Instead, the legislation, which leaves a great deal to be desired, actually requires significant judicial discretion simply to interpret the statute. Congress failed to create the “bright line” which it intended, a concept Long Island Bankruptcy Court Judge Robert E. Grossman cited in one of his recent opinions.
This confusion has led to a spate of law review articles with deriding, mocking and skewering titles such as “BAPCPA: Trying to Make Sense Out of Nonsense.” I can come up with some of my own: “BAPCPA is Bupkis” and “Mean Streets to the Means Test – An Ugly Road to Bankruptcy Court.”
The Ambiguity of the New Laws Makes Bankruptcy Challenging
The Ambiguity of the New Laws Makes Bankruptcy Challenging
What all this means is that if an issue has not yet been decided in your jurisdiction, counsel has little guidance as to how the local bankruptcy court will rule. So imagine the challenge of trying to advise clients when a judge in Connecticut has held one way, a judge in New Jersey has reached a decision that is totally opposite, and our jurisdiction has not even addressed the issue yet. And then, most issues are also finding their way up to the appellate courts.
BAPCPA has created a wide split among courts, not only upon the interpretation of whether a consumer has too much income to qualify for Chapter 7 relief, but upon the methodology used to calculate what income really is.
Courts seem to be debating endlessly concepts such as whether projected disposable income requires either an “anticipated” or “historical” calculation of income. In other words, do you use a backwards-looking approach or a forwards-looking approach? Judge Grossman has already written a number of decisions seeking to make this distinction. (FYI, he’s a forward-looker.)
The Strict Constructionist Verses the Logical Originalist in Bankruptcy Court
Inconsistencies in BAPCPA language have created two approaches to addressing conflicting interpretations. You have the strict constructionists who believe a statute should be interpreted on its face, regardless of the result, and those who believe that maintaining a logical outcome based on the legislature’s original intent is paramount.
We’ve come to learn that Judge Grossman is of the school of thought “supported by reason.” He recently wrote in one of his decisions interpreting the means test: “Absent clear binding authority in this Circuit, this Court will not adopt a reading of the statute which does not make any sense.”
As Judge Grossman wrote just last week in In re: Rabener, “this Court does not share the view that a rigid application. . . is required because the 2005 BAPCPA amendments were intended to blindly reduce judicial discretion. This Court does not believe that it is required to reach a decision that is absurd on its face merely to satisfy an unsupported argument that eliminating or reducing judicial discretion is more important than reaching a sound conclusion consistent with reason.” In re Rabener, No. 809-75719, slip op. (E.D.N.Y. January 21, 2010).
Do you look at the “plain meaning of the statute” or do you try to ascertain “what Congress originally intended?” Perhaps that depends on which side you’re on.
So what can the bankruptcy practitioner do when courts across the country are divided on issues? Hope for the best. Such uncertainty makes practicing bankruptcy law post-2005 daunting to say the least. But all those divergent decisions sure make for good reading.
About the Author. Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the February 2010 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Patchogue, Commack, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.
Written by Craig D. Robins, Esq.
This post is part of a series of articles that I’ve written this week addressing every aspect you will need to know about filing bankruptcy, protecting tax refunds, and related issues. Links to all posts in this series are at the bottom of the page.
Tax Refunds in Chapter 13 Bankruptcy Cases Filed in New York
Generally, if you file for Chapter 13 bankruptcy in New York, you will be able to keep your tax refund if your Chapter 13 plan provides for a 100% payment to all creditors. If it does not, then you will have to remit any tax refund to the Chapter 13 trustee, who will include it in the distribution to creditors.
If you have a Chapter 13 plan that provides for a payment of less than 100% to unsecured creditors, then you will also have to remit all future tax refunds to the trustee for the period of the plan, which would probably be five years. Here’s why:
A debtor in a Chapter 13 case is required to pay all projected disposable income into the Chapter 13 plan. Tax refunds are considered additional income that the debtor has over-withheld. Thus, when this income comes in, it has to be paid into the Chapter 13 plan.
In those Chapter 13 cases where you have to submit your tax refund to the Chapter 13 trustee, there will be clear and explicit language in the Chapter 13 plan about this, which will also indicate that you are responsible for sending a copy of your tax return to the trustee at the same time that you file it.
TIP: The higher the number of exemptions that you provide to your employer on an IRS W-9 tax form, the less the witholding will be, and the smaller the tax refund. In sub-100% Chapter 13 plans, you will want to have as small a refund as possible, because any refund that you do end up receiving just goes to your creditors, and does not benefit you in any way.
Effect of Receiving Tax Refund Before Filing Bankruptcy: Possible Whammy on the Means Test
Yesterday I wrote about How a Tax Refund Can Mess Up Your Bankruptcy Means Test . Well, the same means test that is used in Chapter 7 cases to determine eligibility to file for Chapter 7 relief, is also used in Chapter 13 cases to determine the minimum amount that you have to pay into the Chapter 13 payment plan.
If you file a Chapter 13 petition in the six-month period after receiving a tax refund, then you must include the tax refund in the means test as income. This is because all income received during the six-month means test period must be listed, and income tax refunds constitute income for this purpsoe.
Even though the income tax refund can be pro-rated to reflect receiving it over a twelve-month period, it will nevertheless increase the amount you will have to pay in the means test. However, if you file your bankruptcy petition more than six full calendar months after receiving the tax refund, you do not have to include the tax refund, based on a strict interpretation of the law.
This means that most people who file for Chapter 13 during the second half of the year who have plans that pay less than 100% can expect to pay less into their Chapter 13 plans each month. This is not exactly a logical result, but it’s the result of a very poorly and ambiguously worded means test statute.
Quick Links to All Tax Week Blog Posts About Tax Refunds and Bankruptcy:
Informative Article About Eliminating Taxes in Bankruptcy:
Article About Tax Consequences and Bankruptcy:
Written by Craig D. Robins, Esq.
This post is part of a series of articles this week addressing every aspect you will need to know about filing bankruptcy, protecting tax refunds and related issues. To see all posts in this series to date, click this link: Tax Refunds and Filing Bankruptcy .
Effect of a Tax Refund on the Means Test
For purposes of the means test, a tax refund that is received during the six-month means test period, must be included as income for purposes of the means test.
Technically, the means test requires that you allocate the full tax year refund into a six-month period, which as the effect of doubling the amount of the refund, which can provide for a very unfair result, and can result in you failing the means test for this reason alone.
Fortunately, it seems to be the accepted practice to pro-rate the refund over a twelve-month period.
However, strictly construing the means test can sometimes help a debtor. If the tax refund is received outside of the six-month means test period, then technically it does not have to be included in the means test at all.
I’ve learned over the years from representing our Long Island bankruptcy clients, that including the tax refund in the means test or not can sometimes make the difference between passing the means test or failing it.
This underscores the importance of getting competent advice from an experienced bankruptcy lawyer before filing for bankruptcy.
Written by Craig D. Robins, Esq.Some clients ask if they have to be poor, penniless or destitute to file for bankruptcy. The answer is no.
Most of our Long Island bankruptcy clients actually have steady jobs and earn significant salaries. You do not have to be in the “poor house” to eliminate debts and get bankruptcy relief.
A good majority of our clients are working and earning typical salaries that employees on Long Island tend to earn. We started getting so many clients earning more than $100,000 per year that several months ago I wrote a blog post: If I Make Over $100,000 a Year, Can I Eliminate Credit Cards Debts in Bankruptcy?
Bankruptcy relief is available to anyone who is over-burdened by their debts and has difficulty paying them.
Although many of our clients have regular, steady jobs and are earning healthy salaries. they share key one point in common: dealing with their debts has become overwhelming. For many middle-class Long Island consumers, bankruptcy is the only realistic way out of a bad debt situation. See my post: Middle-Class Being Driven Into Bankruptcy by Recession According to Report .
When we meet with a client, we look at salaries and income to analyze them for determining eligibility under the means test . Seven out of eight people who we meet with qualify for eliminating all of their debts with Chapter 7 bankruptcy. Those who do not qualify for Chapter 7 bankruptcy can still seek relief under Chapter 13.
In these difficult financial times, many people are out of work. But, many others continue working, only to pay a great portion of their take-home income to pay their credit card debts. Whether you are working or unemployed, bankruptcy is an option for managing debt and getting a fresh new financial start.
The first step in tackling serious debt problems is meeting with a Long Island bankruptcy attorney.
Written by Craig D. Robins, Esq.Income is a very important factor in determining whether a consumer can file for Chapter 7 bankruptcy. However there is no ceiling or cut-off point for any particular salary level.
That is because the bankruptcy means test determines Chapter 7 eligibility, involving a number of different variables and calculations, income being only one of them. A high amount of income, by itself, is not determinative of precluding one from filing for Chapter 7 relief.
The means test not only looks at salary, but also looks at a debtor’s various expenses and other variables. The Means Test is Often the Key to a Successful Chapter 7 Bankruptcy Case .
Some debtors who have family incomes below a certain amount automatically qualify for Chapter 7 bankruptcy filing. See my post: Bankruptcy Means Test Figures To Be Updated for New York Consumers.
I regularly represent many debtor’s who earn over $100,000 a year. This year we’ve filed a great number of Chapter 7 cases in which the family income ranged from the 130,000 level to close to $200,000. Earlier this year I wrote a post entitled, Can You File Chapter 7 Bankruptcy on Long Island With a Family Income of $200,000 a Year?
Individuals with high incomes frequently pass the means test when they have several of the following situations:
• large family size
• one or more elderly relatives who are dependants
• large mortgages
• two car loans or leases with significant payments and many months remaining
• significant contributions towards health or life insurance
• significant child-care expense
• large amounts of non-dischargeable income tax debt
All of the above variables act as means test deductions that enable consumers with high incomes to reduce the amount of their disposable income, which is the key factor in ascertaining Chapter 7 eligibility.
For those with high income, preparing the means test and evaluating the results is the only way to determine if they are eligible to file for Chapter 7 bankruptcy. Also see my post: If I Make Over $100,000 a Year, Can I Eliminate Credit Cards Debts in Bankruptcy?
Finally, even if a consumer does not initially pass the means test, there is still hope for filing a bankruptcy petition: Options If You Fail the Bankruptcy Means Test .
Written by Craig D. Robins, Esq.Most clients who we represent do indeed pass the means test in Chapter 7 bankruptcy cases. I would say that at least seven out of eight people who desire to file for Chapter 7 bankruptcy on Long Island are eligible to do so because they pass the means test.
The means test is a formula and bunch of calculations designed to ascertain whether someone has too much income to be eligible to file for Chapter 7 bankruptcy. The Means Test is Often the Key to a Successful Chapter 7 Bankruptcy Case.
So What Are Your Options If You Do Not Pass the Means Test, and You Hope to File for Chapter 7 Bankruptcy?
Fortunately, there are several possibilities, and disposing of debt through a bankruptcy proceeding usually remains an option in one form or another.
Waiting to Become Eligible for the Bankruptcy Means Test Later
Sometimes, someone does not pass the means test because they received a large amount of money in the prior six-month means test period. The means test requires that you include all income that you received in the six full-calendar month period prior to filing. (You don’t include income that you received in the month that you file).
The most common example of a large amount of non-recurring income is a tax refund. Suppose you received the tax refund in May. Then you must count the tax refund in the means test calculation as long if you file your petition between June and November of that year. If you have to include the tax refund, it will have the effect of artificially boosting your income for that period.
However, if you just wait until December or later, then you will not have to include the tax refund as part of the six-month income for the means test calculation.
There are other reasons why waiting to file bankruptcy can help. Some people previously earned a larger amount of income several months ago, but no longer have the ability to earn at the same level for various reasons.
It might be that they were laid off (or their spouse was laid off); or they can no longer earn overtime; or their income will be reduced for other reasons like a new job that doesn’t pay as much.
In such instances, waiting a few months can mean the difference between passing the bankruptcy means test or not.
Engaging in Financial Transactions That May Make You Eligible Under the Bankruptcy Means Test
An experienced bankruptcy attorney is also familiar with all of the intricacies of the means test, and can often recommend other possible ways that may enable a consumer to become eligible.
For example, there is currently an issue as to whether an attorney can recommend to a client that he or she incur debt in contemplation of filing for bankruptcy (This issue is actually before the United States Supreme Court right now).
In any event, if a debtor obtains a new car loan or lease just before filing, the amount of the new monthly car payment can be included as a means test deduction, and this can possibly make the difference between passing the means test or not.
This is just one of several financial transactions that one can do that may make have the effect of qualifying you for Chapter 7 bankruptcy filing under the means test. A good bankruptcy attorney may also suggest other possibilities.
Filing Chapter 13 Bankruptcy Instead of Chapter 7 Bankruptcy
Most people who do not qualify for a Chapter 7 bankruptcy filing because they did not pass the means test can still file for Chapter 13.
If they do, they still get immediate debt relief through the same automatic bankruptcy stay that stops all creditor action in Chapter 7 cases. However, they will have to pay something to their creditors, usually over a five-year period of time. This is done by making monthly payments to a Chapter 13 trustee.
The good news, though, is that frequently, the amount paid back is a small fraction of the amount owed — sometimes as little as ten percent.
When No Bankruptcy Offers a Feasible Solution, Debt Settlement Can Be the Answer
Very few of our clients who desire to file bankruptcy do not qualify for one chapter or another. However, there is always an option for those who can’t file bankruptcy or do not want to file. That is debt settlement.
Debt settlement, which is not to be confused with debt consolidation, is when we negotiate settlements with the credit card companies (or their collection attorneys), often for less than 50%, and frequently for as little as 25%.
Doing so, however, requires the ability to fund lump-sum settlements, as the best credit card settlements are only available when the settlement amount is paid in full.
No One Ever Said that the Means Test in Bankruptcy Was Fair
To the contrary, the means test was the most controversial aspect of bankruptcy reform when the laws were changed about four years ago.
The means test tends to actually reward those with significant secured debt by making it easier to qualify for Chapter 7 filing. Thus, if you have a high mortgage and several car loans or car leases, it is easier to pass the means test and be eligible to file for Chapter 7 bankruptcy.
An Experienced Long Island Bankruptcy Attorney Can Evaluate Your Means Test Eligibility
The means test is rather complex and complicated. Retaining an experience bankruptcy attorney is your best way to ascertain whether you qualify for Chapter 7 bankruptcy filing, and if not, to learn what your other options are.
To see a bunch of other posts that I’ve written about the means test, please click : Information about the bankruptcy means test.
Written by Craig D. Robins, Esq.The simple answer is that all income of any kind must be disclosed in a bankruptcy filing. Some clients think that because they “work off the books” they don’t have to disclose that income. That’s certainly not the case. All income must be disclosed — no matter how it is received.
In addition to salary and earnings from employment, all other types of income must be disclosed as well. These include:
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Rental Income
- Business Income
- Investment Income
- Child Support, Alimony, and Maintenance
- Gambling Winnings
- Pensions and Retirement Income
- Individual Retirement Account (IRA) Withdrawals
- Life Insurance Policy Withdrawals
- Money received through Inheritance
- Social Security / SSDI Benefits
- Disability Payments
- Unemployment Insurance Proceeds
- Workman’s Compensation
- Food Stamps or Welfare
- Annuity payments
- Regular Contributions from others in the household
- Payment on Notes and Mortgages you own
Even though all income must be disclosed, that doesn’t necessarily mean that all of it must be included in the means test. For example, Social Security payments do not fit into the means test calculation.
There can be strict penalties for failing to accurately disclose all of your income. They include having your bankruptcy petition dismissed or being denied a discharge. Consumers have a great opportunity to discharge their debts with bankruptcy. It’s not worth messing around and jeopardizing your ability to eliminate your debts by neglecting to reveal everything.
Written by Craig D. Robins, Esq.At various times this year, Congressional committees have pondered the idea of making it easier for consumers who are overwhelmed with medical debt to file for bankruptcy.
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I previously discussed this in: Special Bankruptcy Protection on the Way for Consumers with High Medical Debts and Congress Considers Amending Bankruptcy Code to Make it Easier for Consumers to Discharge Medical Debt .
Yesterday, the Senate Judiciary Subcommittee on Administrative Oversight and the Courts held a hearing on proposed legislation to make it easier to file for bankruptcy relief for those consumers whose medical debts are the primary cause of their financial difficulty. The legislation is being sponsored by subcommittee chair Senator Sheldon Whitehouse (D-R.I.).
The hearing questioned whether the new bankruptcy laws adopted in 2005 make it unreasonably difficult for consumers burdened with medical debt to get a fresh new financial start.
One of the key issues is determining what consumers would be eligible for relief.
The other key issue concerns what the relief would be. Here’s what was being discussed:
A) the means test would be waived
B) the credit counseling requirements would be waived
C) there would be a national homestead exemption of $250,000 for these debtors
D) these debtors would be permitted to pay some of their attorney’s fees after filing
Written by Craig D. Robins, Esq.New Bankruptcy Means Test Criteria Goes Into Effect November 1, 2009
Passing the bankruptcy means test is dependant upon the amount of median income in the state where you live. For New York residents, it will be slightly easier for some families to qualify for Chapter 7 bankruptcy next month. For those seeking to file for Chapter 13 bankruptcy, some families will be able to pay less each month.
The figures used for the each state’s median income are based on United States Census data, and adopted by the Office of the United States Trustee.
The last time the median income figures were updated was March 15, 2009, and I wrote a blog article about that. See Good News for Consumers on Long Island — Chapter 7 Bankruptcy Will Be Easier to Qualify For .
The new figures go into effect for those personal bankruptcy cases filed after November 1, 2009. To see the new median income data for each state, go to the U.S. Trustee Census Bureau Median Income Chart.
New Means Test Figures Not Helpful for Everyone
Family Size of One: For the first time ever, some of the figures have actually decreased. If you are a single individual, which means that you have a family size of one, the New York median income has decreased from $46,523 to $46,485. This is a change of only $38 per year, or $3 per month. Nevertheless, it is less. Chances are, however, that one will be adversely affected by such a small change
Family Size of Two: For a family size of two, the new median income figure is just over $1,000 more than the old amount, making it slightly easier to qualify.
Family Size of Three: For a family size of three, the new amount is about $1,400 per month more, which will certainly be a help.
Family Size of Four: For a family size of four, the new median income amount is actually about $500 less than the previous figure, making it the slightest bit harder for typical families to qualify for Chapter 7 bankruptcy. However, the difference is so small that it should hardly matter for most Long Island consumers.
The Bankruptcy Means Test
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This is a comprehensive, very complex series of calculations that the federal government designed to ascertain whether someone qualifies for Chapter 7 filing. Under the old bankruptcy law, almost anyone could seek to eliminate their debts by filing Chapter 7. The new laws changed that. Click here to take a look at the actual Means Test form.
The Means Test formula is designed to evaluate whether a debtor has the financial means to pay back a substantial portion of his or her debts. If the person does, then he or she may not be eligible to file Chapter 7 bankruptcy, and may instead have to file a payment plan bankruptcy under Chapter 13. If debtor’s income is below the New York State median income for a family of that particular size, then passing the Means Test is virtually automatic. If not, the debtor must have a sufficient amount of acceptable deductions permitted by the Means Test.
Impact of New Means Test Figures on Consumers Filing Bankruptcy on Long Island
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In my Long Island bankruptcy law practice, I estimate that about 7 out of 8 clients now seeking to file for Chapter 7 bankruptcy relief do indeed qualify under the means test. The new numbers may just slightly help some couples or small families qualify for Chapter 7 bankruptcy when the new criteria is used.
New Median Family Income Figures for New York
(Effective for cases filed after 11/1/09)
Family Size Amount
1 $46,485
2 $58,109
3 $69,421
4 $82,457
Add $6,900 for each individual in excess of 4.
Written by Craig D. Robins, Esq.When debts are primarily business debts, a debtor is excused from the means test
Last night I conferred with a client who did not pass the bankruptcy means test. Ordinarily, passing the means test is a prerequisite for being eligible for Chapter 7 bankruptcy filing. However, failing the means test was not a problem for this client. Most of his debts were the result of personal guaranties on a failed business.
The debtor had operated several automobile dealerships on Long Island. Unfortunately, due to the problems with the economy, the dealerships recently went out of business, leaving the debtor on the hook for almost two million dollars in corporate debt that he personally guaranteed.
When we plugged all of his data into the means test, he did not pass. However, the Bankruptcy Code states that if debts are primarily non-consumer debts, the debtor is exempt from the means test, and the means test does not have to be filled out.
We will therefore be able to file his Chapter 7 bankruptcy petition even though he fails the means test.
What does consumer debt include? Consumer debt includes debt incurred for personal, family, or household purposes. That would encompass typical credit card debt, utility bills, medical bills, car loans and mortgages. However, obligations resulting from business are not considered consumer debt.
How much debt must be non-consumer debt in order to be exempt? The bankruptcy statute uses the word, “primarily.” That means at least 50%.
Keep in mind that you must include the full balance on a mortgage as part of consumer debt. Since most business owners own mortgaged homes with mortgages totaling several hundred thousand dollars, the amount of business debt must be quite substantial in order to invoke the exemption.
Also note that if a credit card was used to pay business expenses, then the credit card debt is not a consumer debt.
Click here to see a copy of the bankruptcy means test form. For more information on the means test, see my post, The Means Test is Often the Key to a Successful Chapter 7 Bankruptcy Case .