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Bankruptcy Means Test
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Written by Craig D. Robins, Esq.“My girlfriend is thinking of leaving me.” This is a comment I hear repeatedly, in one form or another, quite regularly in my bankruptcy practice, when I counsel singles in serious relationships who suffer from debt problems.
After all, who wants to marry into debt? Sometimes the thought of marriage drives lovelorn, debt-laden consumers to see me. Their significant other has given my client an ultimatum: Either you clean up your finances or I will not marry you!
Those just starting to date will typically avoid broaching certain topics like how much money they owe on their credit cards. Of course, these facts tend to emerge as the relationship becomes serious — and then there are problems.
This is a concept I recently discussed with Jennifer Gargotto who blogs about dating issues in her blog, MsMorphosi.com. We talked about this phenomenon at BlogWorld this week, a large conference and tradeshow for us bloggers.
Fortunately, Chapter 7 bankruptcy often provides an escape from debt, and seeking bankruptcy relief when necessary can, and often should, be done before getting married. It is often easier to discharge debt while you are still single, and before you get married.
Here’s why: The bankruptcy means test requires married individuals to calculate the income of both spouses to determine Chapter 7 eligibility, but it does not necessarily require a single person who is filing to include the income of a significant other. In addition, the Chapter 7 trustee appointed to a case is entitled to ask to see a non-filing spouse’s financial information. In most cases, a trustee would not seek such information from a non-married significant other.
Determining family size for means test purposes can still be tricky, even for single consumers, and obtaining the advice of an experienced bankruptcy attorney is important. In any event, avoiding the additional burden and stress of debt when heading towards marriage can only make for a better, healthier and more stable relationship.
So if you have significant debt problems, consider consulting with a bankruptcy attorney now. And for those married couples with significant debt, Bankruptcy Can Save Your Marriage.
Written by Craig D. Robins, Esq.In order to qualify for filing a Chapter 7 bankruptcy petition, you need to pass the means test, which is designed to prevent those individuals with relatively high incomes from easily eliminating their debts in a Chapter 7 proceeding..
The means test formula makes it easier for a larger family to be eligible for Chapter 7 relief than a smaller one. Each additional family member enables the debtors to take an additional, very significant deduction on the means test. These deductions are based on census tables and IRS charts of living expenses. See: New Changes to Means Test.
Most consumers will pass the means test and will not have any problem qualifying for Chapter 7 bankruptcy. However, some individuals, who are just barely failing the means test, can pass if they have the ability to add an additional family member to the calculation. The Means Test is Often the Key to a Successful Chapter 7 Bankruptcy Case .
Dealing with the Means Test If a Female Debtor is Expecting
If the wife is pregnant and expecting, can you include the unborn child as household member of the family to calculate family size for means test purposes? If you could, this might mean the difference between passing or not.
In at least one case, the United States Trustee has taken the position that an unborn child cannot be included as a family member for means test purposes. Some bankruptcy courts have adopted this position stating that a debtor may not rely on events which have not yet occurred.
That was the case in In re Pampas, 369 B.R. 290 (Bankr.M.D.La. 2007). In that case, the child had not been born as of the date of the bankruptcy filing, and the debtor was still carrying at the time the U.S. Trustee brought a motion do dismiss. The court dismissed the case, although the unborn child issue was just one of several concerns the court addressed.
However, this case and outcome does not necessarily spell doom for the debtor, and I do not think a similar result would have occurred if this situation had arisen here in New York.
Arguing “Special Circumstances” As a Way Around a Failing Means Test
A debtor who has filed with an unborn child, can argue “special circumstances” under Bankruptcy Code § 707(b)(2)(B).
This section enables a debtor to argue that a presumption of abuse, which is what happens if the debtor fails the means test, can be rebutted by demonstrating that there are special circumstances that justify additional expenses or adjustments to the current monthly income.
Generally, to support a claim of special circumstances, the debtor must itemize each additional expense or adjustment of income, and provide documentation and a detailed explanation of the special circumstances that make those expenses or income adjustments necessary and reasonable.
Perhaps the U.S. Trustee Would Be Reasonable
I would like to think that most local offices of the U.S. Trustee would be reasonable under such situations and keep the case in abeyance, pending the birth of the child. It would seem unlikely that a US Trustee would put much effort into seeking dismissal of a case, when shortly after the dismissal the debtor would qualify anyway because of the increased family size after the baby is born.
I personally represented a debtor last year where this became an issue. I did not include unborn children in the family size at the time of filing. However, the Chapter 7 trustee questioned the propriety of some of the other deductions on the means test and debated whether to refer the matter to the U.S. Trustee for further review as to whether the meanst test meant that this was an abusive filing.
My response to the Chapter 7 trustee was that it didn’t matter because the debtor was several months pregnant with twins, and even if the trustee was able to disallow some of the debtor’s means test deductions, the debtor would still quickly qualify in any event because of the increased family size. After some back-and-forth discussion, and proof that the debtor was pregnant, the trustee let the matter go, and the debtor received her discharge.
I also find that communicating in advance with the U.S. Trustee is very important. If I had to file a case in which the debtors had to rely on an unborn child to pass the means test, I would disclose the information early on.
If the U.S. Trustee believes that the debtor has filed in good faith, then it is much more likely that they will evaluate the case in a fair and equitable manner and give due consideration to the debtor’s special circumstances.
An Objection by the U.S. Trustee Can Be Politically Charged
In parts of the country, the U.S. Trustee might want to avoid raising controversy over the potential for politically-charged issues which can result in Roe v. Wade type arguments that are used in debates over the right to abortion.
There’s Always Waiting a Few Months so the Unborn Child Can Undisputedly Be Included in the Bankruptcy Means Test
If debtors want to play it safe, they can wait until the baby is born before filing. That way, there would not be any controversy of dispute over family size. However, sometimes debtors need immediate bankruptcy relief and simply cannot wait.
In a worse-case scenario, if the U.S. Trustee brought a motion to dismiss the case, refusing to accept the unborn child as a member of the household for means test purposes, the debtor could always let the case be dismissed, and then re-file after the child is born.
Also see my post: Options If You Fail the Bankruptcy Means Test .
Other Issues Concerning Family Size for Bankruptcy Means Test Purposes
Calculating family size for the means test can be tricky. This subject seems to be a never-ending source of issues and bankruptcy court decisions. See my post: Determining Household Size for the Means Test .
Unborn Children in Chapter 13 Bankruptcy Cases
In Chapter 13 cases, a debtor will often pay less into a monthly Chapter 13 plan if there is another member of the household. This savings is usually many hundreds of dollars a month. Therefore, an expected child could make a great impact as to the affordability of a Chapter 13 plan.
If the issue of an unborn child arose in the context of a Chapter 13 filing, I would argue that confirmation should be delayed until the child is born if the Chapter 13 trustee is not willing to count the unborn child right away. Then, assuming the child is indeed born, the baby should be included in the household size.
Most Bankruptcy judges, at least in New York, are forward-thinking judges who want the means test in Chapter 13 cases to be based on realistic events going forward, as opposed to looking backward. I explored this concept in my post: Deciphering the Plethora of Means Test Cases Across Many Bankruptcy Courts .
In one Colorado case, the bankruptcy court stated that a debtor had the right to amend schedules to show an increase or decrease to household size prior to plan confirmation, to reflect changed circumstances. In that case, the unborn child was delivered just days after the Chapter 13 trustee filed a pre-confirmation motion to dismiss. In re Baker, (Bankr. Court, ND Illinois 2009).
In the Baker case, the court interpreted Bankruptcy Code § 1325(b)(1) (which states that the applicable commitment period should be determined as of the plan’s effective date), as meaning the date when the plan is confirmed. Thus, the Baker court permitted the debtors to include the unborn child in the means test over the objections of the Chapter 13 trustee.
The Importance of Consulting with Experienced Bankruptcy Counsel When There Are Means Test Issues
When unusual issues arise that can mean the difference between qualifying or not for bankruptcy relief, it becomes that much more important to seek out experienced bankruptcy counsel.
The means test is rather complex and complicated. Retaining an experienced Long Island 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.
Written by Craig D. Robins, Esq.Some Debtors Who Have Primarily Business Debts Can Avoid Having to Do the Bankruptcy Means Test
The means test, which turned six-years old last month, was intended by Congress to create an objective standard for permitting only those consumers who are not “abusing” the privileges of bankruptcy to get Chapter 7 relief.
In general terms, if a consumer debtor has an income that is relatively high in relation to his or her expenses, the consumer will not pass the means test and will not be eligible to file Chapter 7 bankruptcy.
The Business Debt Exception to the Means Test
The means test only applies to individuals whose debts are “primarily” “consumer debts,” as opposed to business debts, as set forth in Bankruptcy Code §707(b).
A debtor can check a box on the first page of the means test to declare that his or her debts are primarily non-consumer debts, and then avoid the rest of the means test, also known as Form B22A. Click here to take a look at the actual Means Test form.
Congress could have told us what exactly “primarily” means, but they didn’t bother to, so we have to analyze this word. Webster’s Dictionary defines “primarily” as “for the most part.” Most courts have focused on this definition to mean “more than half.”
Thus, if more than 50% of the debtor’s debts are non-consumer debts, the debtor is automatically eligible for filing a Chapter 7 case without having to bother with the means test. There is no presumption of abuse for such cases.
Determining What “Consumer Debts” Are in Bankruptcy Cases
So what exactly is a consumer debt? The Bankruptcy Code defines “consumer debt” as “debt incurred by an individual primarily for a personal, family, or household purpose.”
In analyzing whether a debt is a consumer debt or not, bankruptcy courts have developed a “profit motive” test: if the debt was incurred with an eye towards making a profit, then the debt should be classified as a business debt.
Thus, the mortgage on an individual’s home would clearly be a consumer debt, and the mortgage on a vacation home would also be a consumer debt. However, if that vacation home was also purchased as an investment and rented out, then the mortgage would qualify as a business debt.
One bankruptcy court permitted a debtor to deem one of the three mortgages on his home to be a non-consumer debt because the proceeds were used to fund a business venture.
One bankruptcy court permitted a debtor to deem one of the three mortgages on his home to be a non-consumer debt because the proceeds were used to fund a business venture.
Most credit card debts are obviously consumer debts. However, if an individual used a credit card for business purposes, then it could be reasonably argued that the resulting liability is a business debt.
Other examples of business debts include personal guaranties on business obligations, investment losses, and motor vehicle accident liabilities. Domestic support obligations such as child support and maintenance are generally considered consumer debts.
Some Varieties of Debt Are Neither a Business Debt Nor a Consumer Debt
According to conflicting bankruptcy court decisions, some debts are in limbo. For example, although some courts have held that student loans are not consumer debts, the Second Circuit has held that they are.
Any liability as a responsible person for taxes on a business is clearly business debt. However, there is no clear-cut answer in this jurisdiction as to whether personal income tax obligations are consumer debts or not. Courts outside of New York and the Second Circuit have reached different conclusions on income tax debt.
In one case in the Sixth Circuit, the court rejected the application of the profit motive test, concluding that income taxes can be distinguished from consumer debts for several reasons. Tax debts are not incurred like consumer debts as they are not incurred voluntarily.
Tax debt is assessed for the benefit of the general public whereas consumer debt is incurred for personal and household purposes. Finally, tax debt arises from income and earning money whereas consumer debt results from consumption and spending money. In re Westberry, 215 F.3d 589 (6th Cir. 2000).
Most of the debtors that I have represented in my Long Island bankruptcy practice who were able to make a means test business debt declaration were victims of a failed business who owed substantial sums — either directly or through personal guaranties — to various trade creditors, taxing authorities or business partners.
Most of the debtors that I have represented in my Long Island bankruptcy practice who were able to make a means test business debt declaration were victims of a failed business who owed substantial sums — either directly or through personal guaranties — to various trade creditors, taxing authorities or business partners.
Most individuals with a failed mom and pop business will not be able to take this shortcut as their mortgage debt alone will likely exceed their business debt.
The Business Debt Exception to the Means Test Has Limitations
Just because a debtor can by-pass the means test does not mean that a debtor can use it as a loophole to escape other good faith requirements.
In a Michigan decision from earlier this year, the bankruptcy court addressed a situation involving husband and wife debtors whose debts were genuinely primarily business debts. They had over six million dollars of unsecured debts from failed real estate investments.
However, both debtors were doctors whose budget showed that they were living on $42,000 of monthly expenses – what the court described as a very lavish and extravagant lifestyle. They each drove a Mercedes Benz and had a BMW in the garage.
The court commented that even though the debtors did not fail the means test, they nevertheless lacked good faith because they could have easily adjusted their budget while still maintaining a nice lifestyle, and paid their creditors a significant dividend through a Chapter 11 plan. In re Rahim and Abdulhussain, No.l 10-57557 (Bankr.E.D.Mich 12/16/10).
Practical Tips for Bankruptcy Attorneys to Help Their Clients
If the characterization of a particular debt that is not clear-cut in this jurisdiction, such as tax debt, enables your client to pass the means test, how should you tackle the situation?
That really depends on how aggressive you want to be. My recommendation is to take an aggressive position as long as it is reasonable and you have a good basis for taking your position.
That really depends on how aggressive you want to be. My recommendation is to take an aggressive position as long as it is reasonable and you have a good basis for taking your position.
You should be prepared for presenting your arguments to the U.S. Trustee as they have the initial burden of proof to support a dismissal motion under Bankruptcy Code § 707(b).
You would also want to review the matter with your client before filing the petition and prepare a letter that the client signs, acknowledging the aggressive position and the potential risk of defending a dreaded Bankruptcy Code §707(b) motion that the U.S. Trustee brings. Defending Bankruptcy Code §707(b) motions will certainly be a topic for a future column.
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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 November 2011 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 Mastic, Patchogue, Commack, West Babylon, Coram, 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.
by Craig D. Robins, Esq.
New Bankruptcy Means Test Criteria Going Into Effect November 1, 2011 Will Make It Harder for Some New York Consumers to Qualify for Chapter 7
The state median income figures that you need to use for the means test change periodically. The last change was on March 15, 2011, and the change before that went into effect exactly a year before that, on March 15, 2010. The change before that was November 1, 2009.
The means test median income figures usually change twice a year — in March and November.
The changes earlier this year in March 2011 actually made it slightly easier to qualify. However, the changes going into effect next month will make it slightly harder for most Long Island and New York consumers.
In order to automatically pass the bankruptcy means test your income must be less than the median income in the state where you live. For New York residents, it will be slightly harder for some families to qualify for Chapter 7 bankruptcy than earlier in the year.
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New Median Family Income Figures for New York Effective Nov. 1, 2011
(Effective for cases filed after 1/01/11)
Family Size Amount
1 $45,931
2 $56,113
3 $66,953
4 $81,212
Add $7,500 for each individual in excess of 4.
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New, New York Means Test Figures Compared to Current Means Test Figures
Family Size of One: If you are a single individual, which means that you have a “family size of one”, the New York median income has decreased, from $46,295 earlier this year to $45,931. This is a minor change of $364 per year, or about $30 per month.
Family Size of Two: For a family size of two, the new median income figure has decreased, from $57,777 earlier this year, to $56,113. This is a significant change of $1,664 per year, or about $139 per month.
Family Size of Three: For a family size of three, the new median income figure has decreased, from $68,396 earlier this year, to $66,953. This is a significant change of $1,443 per year, or about $120 per month.
Family Size of Four: For a family size of four, the new median income figure has decreased, from $83,942 earlier this year, to $81,212. This is a very significant change of $2,730 per year, or about $228 per month.
Why Bankruptcy Means Test Figures Routinely Change
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. These figures routinely change once or twice a year. Pursuant to 11 U.S.C. § 101(39A)(B), the means test median income data is regularly adjusted, based upon the Consumer Price Index (CPI) for All Urban Consumers.
Usually, income rises each and every year because of inflation, the cost of living, etc. When we were deep into the recession 18 months ago, income actually decreased slightly from the prior year. That resulted in lower median income figures which made it more difficult to qualify for Chapter 7. Although there was a little bit of inflation after that, we have since gone through another round of deflation.
It appears that we may not be heading out of the recession so fast, as median family income has decreased over the past six months. Accordingly, debtors will suffer.
Links to Official U.S. Trustee Sites Containing Means Test Data Charts
To see the CURRENT DATA STILL IN EFFECT UNTIL OCTOBER 31, 2011 of new median income data going into effect next week, go to Income Means Test Chart for cases filed beginning March 15, 2011.
To see the NEW DATA THAT WILL GO INTO EFFECT ON NOVEMBER 1, 2011 of new median income data going into effect next month, go to Income Means Test Chart for cases filed beginning November 1, 2011.
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To see the very old and now very obsolete median income data for each of the 50 states, go to the U.S. Trustee Census Bureau Median Income Means Test Chart for cases filed between November 1, 2009 to March 14, 2010.
To see the old data from last year of median income data for each state, which is only good through the end of this week, go to Median Income Means Test Chart for cases filed between March 15, 2010 and October 31, 2010.
To see the old data from earlier this year of median income data for each state, which is only good through the end of next week, go to Median Income Means Test Chart for cases filed between November 1, 2010 and March 14, 2011.
The Bankruptcy Means Test
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
In my Long Island bankruptcy law practice, I estimate that at least 9 out of 10 clients now seeking to file for Chapter 7 bankruptcy relief do indeed qualify under the means test.
Making the most of qualifying under the means test and making the figures work for you requires that you meet with an experienced Long Island bankruptcy attorney to ascertain eligibility for filing for bankruptcy relief.
There Are Many Other Posts About Means Test Issues on this Blog
I’ve written several dozen articles on various issues concerning the bankruptcy means test. You can see them by clicking the category, Bankruptcy Means Test.
Here are some of the more popular posts:
by Craig D. Robins, Esq.
Important Note as of October 18, 2001:
Click link to see new article about: Means Test figures are changing again on November 1, 2011
New Bankruptcy Means Test Criteria Going Into Effect March 15, 2011 Will Make It Easier for Consumers to Qualify for Chapter 7
The state median income figures that you need to use for the means test change periodically. The last change was on November 1, 2010, and the change before that went into effect exactly a year ago, on March 15, 2010. The change before that was November 1, 2009.
It seems the means test median income figures change twice a year to coordinate with the changes to daylight savings time. I’m not sure what the analogy here is.
The changes last fall actually made it slightly harder to qualify. However, the changes going into effect in two weeks will make it slightly easier for most Long Island consumers.
In order to automatically pass the bankruptcy means test your income must be less than the 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 than last year.
The Changes Can Mean Savings of Many Thousands of Dollars for Those Filing for Chapter 13 Relief
For those seeking to file for Chapter 13 bankruptcy, debtors will be fortunate in that many will be able to pay at close to a thousand dollars less each year, or even more than that. A family of four stands to pay about $1,500 less per year, a very significant savings. Considering that a Chapter 13 plan lasts three to five years, that can mean a savings of many, many thousands of dollars.
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. These figures routinely change once or twice a year. Pursuant to 11 U.S.C. § 101(39A)(B), the means test median income data is regularly adjusted, based upon the Consumer Price Index (CPI) for All Urban Consumers.
Usually, income rises each and every year because of inflation, the cost of living, etc. When we were deep into the recession last year, income actually decreased slightly from the prior year. That resulted in lower median income figures which made it more difficult to qualify for Chapter 7, and also required some Chapter 13 debtors to pay more into a Chapter 13 plan.
However, it appears that we may be heading out of the recession as median family income has increased over the past six months. Accordingly, debtors will benefit.
To see the very old and now obsolete median income data for each of the 50 states, go to the U.S. Trustee Census Bureau Median Income Means Test Chart for cases filed between November 1, 2009 to March 14, 2010.
To see the old data from last year of median income data for each state, which is only good through the end of this week, go to Median Income Means Test Chart for cases filed between March 15, 2010 and October 31, 2010.
To see the current median income data for each state, which is only good through the end of next week, go to Median Income Means Test Chart for cases filed between November 1, 2010 and March 14, 2011.
To see the new median income data going into effect next week, go to Income Means Test Chart for cases filed beginning March 15, 2011.
New, New York Means Test Figures
Family Size of One: If you are a single individual, which means that you have a “family size of one”, the New York median income has increased, from $45,548 earlier this year to $46,295. This is a minor but nevertheless significant change of $747 per year, or about $62 per month.
Family Size of Two: For a family size of two, the new median income figure has increased, from $67,292 earlier this year, to $68,396.
Family Size of Three: For a family size of three, the new median income figure has increased, from $56,845 earlier this year, to $57,777.
Family Size of Four: For a family size of four, the new median income figure has increased, from $82,587 earlier this year, to $83,942.
The Bankruptcy Means Test
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
In my Long Island bankruptcy law practice, I estimate that at least 9 out of 10 clients now seeking to file for Chapter 7 bankruptcy relief do indeed qualify under the means test.
Making the most of qualifying under the means test and making the figures work for you requires that you meet with an experienced Long Island bankruptcy attorney to ascertain eligibility for filing for bankruptcy relief.
New Median Family Income Figures for New York
(Effective for cases filed after 03/15/11)
Family Size Amount
1 $46,295
2 $57,777
3 $68,396
4 $83,942
Add $7,500 for each individual in excess of 4.
There Are Many Other Posts About Means Test Issues on this Blog
I’ve written several dozen articles on various issues concerning the bankruptcy means test. You can see them by clicking the category, Bankruptcy Means Test.
Here are some of the more popular posts:
Written by Craig D. Robins, Esq.
Today the U.S. Supreme Court gave us another interpretation of the how the means test should be used in bankruptcy cases by deciding that only consumers who have car loans or car leases can claim a certain motor vehicle “ownership expense” deduction on the means test.
Justice Elena Kagen, in her very first decision since ascending to the Supreme Court, ruled in an eight-to-one opinion that the BAPCPA means test is designed to enable creditors to recover as much as possible while ensuring that consumers seeking bankruptcy relief have enough money to maintain a reasonable standard of living.
The case, Ransom v.F.I.A.Card Services, N.A., had been frequently discussed at national bankruptcy symposiums that I’ve attended during the past year. Even though the case is not a victory for the consumer (it is basically a win for the credit card companies), it was not unexpected either. The Supreme Court upheld the decision of the U.S. Court of Appeals for the Ninth Circuit.
Ransom Case Now Governs Who Can Take Ownership Expense Car Deduction on Means Test
What the case means is that only consumers who have a car loan or car lease can take an additional deduction on the means test that car owners whose vehicles are totally paid off cannot take.
This additional means test deduction can sometimes be significant in enabling a consumer to either pass the means test in a Chapter 7 case or pay substantially less in a Chapter 13 case.
The Ransom decision does not change local practice here in New York at all, as consumer bankruptcy practitioners here have customarily only taken the vehicle ownership expense deduction when the consumer debtor had a car loan or lease.
In her ruling, Justice Kagan sought to interpret the language of the means test statute, which provides that a debtor may claim only “applicable” expense amounts. While the law does not define applicable, the Justice cited dictionary definitions such as relevance and appropriate.
In her decision, Justice Kagan also relied on the “statutory context” that in chapter 13 bankruptcy cases, means testing deductions fill in “amounts reasonably necessary to be expended” by above-median-income debtors.
Finally, Justice Kagan noted that bankruptcy law has a “core purpose of ensuring that debtors devote their full disposable income to repaying creditors.”
What Can Consumer Debtors Do to Get Around the Ransom Decision?
Here is how some bankruptcy debtors who do not have financed vehicles, side-step the issue so that they can obtain the additional means test deduction. Instead of keeping an older, non-financed vehicle, they trade it in for a newer car that is financed by a loan or lease. They do this prior to filing for bankruptcy.
Assuming that they engage in this “pre-bankruptcy planning” in good faith, and that they truly need a newer, more-reliable vehicle, then no one should be able to argue that engaging in such a transaction is abusive bankruptcy conduct.
Even Keeping an Older, Non-Financed Car, Results in an Additional Means Test Deduction
In our jurisdiction, the U.S. Trustee permits debtors to utilize a certain additional IRS used car deduction if the debtor’s car is an older car, which is one which is at least six years old. This is because a good part of the means test deductions are based on IRS cost of living deductions.
If a debtor has an older car, then the debtor can take an additional $200 deduction on the means test. This applies even if the car is financed, in which case the debtor can get a double deduction.
Central Islip Bankruptcy Judges Alan S. Trust, Robert E. Grossman and Dorothy T. Eisenberg at Bankruptcy Roundtable 2010
Written by Craig D. Robins, Esq.
Comment by Bankruptcy Judge Grossman at Annual Update Seminar Hints at How the Central Islip Bankruptcy Court Will Address Future Decisions Involving Means Test Issues
All three Bankruptcy Court judges from the Central Islip Courthouse in the Eastern District of New York attended the Annual Bankruptcy Roundtable panel discussion last night, which was held at the Nassau County Bar Association.
Over one hundred bankruptcy practitioners from Nassau and Suffolk Counties attended the event.
Of course, the presentation included the annual wrap-up of notable Supreme Court bankruptcy decisions and noteworthy local decisions, as well as some nice presentations by some of our local bankruptcy attorneys about substantive law issues.
What I found most significant, however, was not the typical presentation material, but instead, the substance of a two-minute comment that Judge Robert E. Grossman contributed during a review of the Lanning Supreme Court case.
The Comment from Judge Grossman. . .
Judge Grossman, clearly expressing his frustration and dissatisfaction over the poorly-formulated wording in the BAPCPA means test statute, remarked vehemently, “we can’t figure out what this miserably written statute means!”
He then suggested that we seem to be entering a new judicial period in which Bankruptcy Court judges will have more discretion in reviewing means test issues, especially those concerning a debtor’s expenses.
He remarked that we will likely see “less absolutes,” as he predicted that the appellate courts will focus their holdings by utilizing a “plain language” approach.
I found this comment most important as it clearly shows that Judge Grossman, and likely his fellow colleagues on the bench in Central Islip, will be focusing their analysis of means test issues by using a common sense approach as opposed to a strict constructionist approach that can produce a technically-correct, but absurd and unintended result.
Judge’s Comment Underscores Position Judge Will Take with Analyzing Means Test Issues
I have previously written how BAPCPA was designed to essentially remove judicial discretion from interpreting means test results, and I even commented on the “plain meaning” approach that Judge Grossman took in some of his decisions (see my post, Deciphering the Plethora of Means Test Cases Across Many Bankruptcy Courts).
Judge Grossman also referred to his year-old Rabener decision, which I also commented on in my post, Deciphering the Plethora of Means Test Cases Across Many Bankruptcy Courts . In that decision the Judge made clear that he does not believe that the Court should blindly use a rigid application to reduce judicial discretion when reviewing means test issues. He stated that a sound conclusion consistent with reason is paramount.
Now, with comments such as those from Judge Grossman yesterday, it is becoming more and more clear that our Bankruptcy Court will be emphasizing a logical, forward-looking, common sense, plain language approach to analyzing and resolving means test issues.
As an active consumer bankruptcy practitioner who needs to know where his clients stand with the means test, and when to butt heads with a Chapter 13 trustee who takes a nonsensical, yet strict constructionist view of the means test law, today’s comment cements what we are already know — that the Court will most certainly be guided by a common sense approach.
What’s even more important is that in utilizing a common sense approach, the bankrutpcy judges will likely use increased amounts of discretion to reach a reasonable and sound result. So when the Chapter 13 trustee insists that you amend a plan because BAPCPA says so even though it produces a ridiculous result, consider getting an opinion from the judge instead — if the result is reasonable, you now know how the judge will likely rule.
Written by Craig D. Robins, Esq.Many High-income Debtors with Significant Income Can File Chapter 7 Bankruptcy and Still Pass the Means Test
During the past few years I’ve noticed a fascinating trend: I’m counseling more and more bankruptcy clients with high income and high debt.
During the past few years I’ve noticed a fascinating trend: I’m counseling more and more bankruptcy clients with high income and high debt.
Representing such debtors requires addressing certain special issues which I will focus on in this article which was originally published in the June 2010 Issue of the Suffolk Lawyer, a Bar Association periodical.
Blame the Recession
Perhaps the current drawn-out recession is affecting an increasing number of consumers beyond the low and middle-class – long the bastion of typical bankruptcy filers.
In addition, falling real estate values have wiped out the equity in many people’s homes. Many middle and upper-class Americans have thus lost their ultimate source of long-term savings.
Chapter 7 Bankruptcy Is Usually the Consumer’s Best Choice
Assuming that there’s no need to consider Chapter 13 to stop foreclosure, I always strive to file Chapter 7 bankruptcy petitions for all my clients – but doing so requires that they qualify under the means test. After all, if a Chapter 7 case goes smoothly, the debtor will discharge most or all debts and ideally keep all assets.
For high-income debtors, Chapter 7 eligibility has become rather challenging considering that under the 2005 Bankruptcy Amendment Act (BAPCPA), a consumer debtor will almost certainly face opposition to getting a discharge if he or she does not pass the means test. There is no salary cap for filing Chapter 7 Bankruptcy.
The U.S. Trustee is especially vigilant in reviewing any case that is deemed abusive, or that may even be close to being abusive.
Accordingly, analyzing the facts of a high-income debtor becomes critical and properly preparing the means test and other bankruptcy schedules becomes crucial.
How Much Income Is “High-income”?
Lately I’ve been regularly filing Chapter 7 bankruptcy petitions for families with incomes well over $100,000. I recently filed two Chapter 7 cases where the family income was over $200,000. I actually wrote a blog post a year ago entitled: Can You File Chapter 7 Bankruptcy on Long Island With a Family Income of $200,000 a Year?
Considering the perceived income limitations for seeking Chapter 7 relief under the new bankruptcy laws, such high-income filings seem difficult or impossible; yet in practice, they are not.
Generally, a high-income debtor is one who has income over $100,000 per year or $10,000 per month. In my bankruptcy practice, high-income debtors are often executives, doctors, assorted professionals, and families of double-income spouses.
General Principle for Filing High-income Cases
General Principle for Filing High-income Cases
A high-income debtor can file for Chapter 7 relief if the debtor a) passes the means test or conversely does not need to qualify for the means test; and b) passes a totality of circumstances test for filing in good faith – often meaning that all of their expenses are reasonable and necessary. See: If I Make Over $100,000 a Year, Can I Eliminate Credit Cards Debts in Bankruptcy?
Many high-income debtors also have relatively high levels of debt. A former executive previously earning several hundred thousand dollars per year can easily have as much credit card debt.
In such cases, the debt must have been incurred in good faith and must not be unreasonably high in relation to the debtor’s income at the time the debt was incurred. Counsel should devote extra time to reviewing the various debts in such cases.
The Business Debt Exception to the Means Test
Many high-income debtors have very substantial debt obligations from failed business ventures, often due to having signed a personal guarantee. A debtor is excused from preparing the means test if the debtor’s debts are not primarily “consumer debts”, and there is a box on the means test for this exclusion.
A “consumer debt” is defined as a debt incurred by an individual primarily for a personal, family or household purpose. On the other hand, some courts have defined “business debt” as debt that is incurred with a “profit motive.” I hope to devote a future column to a more involved discussion about how courts have defined debt as either business debt or consumer debt.
To see a more thorough discussion of this, please see my post: This Debtor Didn’t Have to Do the Bankruptcy Means Test .
Variables Making High-income Debtors More Eligible for Filing
Certain individuals are able to pass the means test much more easily than others. Those that have large families with multiple dependants, large mortgages, two car loans or leases, mortgage arrears and tax arrears are more likely to qualify under the means test because these items can all be used as means test deductions.
Since individuals with large famlies can benefit from increased means test deductions, consider issues in Determining Household Size for the Means Test .
Frequently, individuals with high income receive year-end bonuses. By timing the filing of the petition, the impact of year-end bonuses on the means test can be minimized or even reduced. See my prior post: Advance Planning: File Bankruptcy Before You Get a Year-End Bonus .
The Budget Must Be Reasonable
Even if the debtor passes the means test, that alone is not enough to demonstrate that the case is not abusive, and that it is filed in good faith. All budget items must be reasonable and necessary, based on the debtor’s actual income going forward. This requires a more subjective and equitable assessment of the debtor’s circumstances.
For example, the U.S. Trustee is likely to object to an expense of $2,000 per month for food for a family of four, but will not have any problem with an expense of $1,200, even though that is on the high side.
Some expenses will not pass muster. The U.S. Trustee will likely argue that an expensive summer camp is unreasonable, as sending the kids there is being done at the expense of the creditors.
Issues with Keeping Rental Property
Issues with Keeping Rental Property
High-income debtors are much more likely to have investment real estate in addition to their homes. In such cases, there is an issue as to whether keeping the rental property is reasonable. If the expenses of retaining the property exceed the amount of rental income, then keeping the property will result in a reduced amount of disposable income.
In such a case, the U.S. Trustee will argue that the debtor will have additional income each month to make payments to creditors if the investment property is abandoned.
In such a case, the U.S. Trustee will argue that the debtor will have additional income each month to make payments to creditors if the investment property is abandoned.
Maintaining a Luxury Residence
A high-income debtor is much more likely to have an expensive home. However, there are some cases across the country in which the U.S. Trustee argued that it is unreasonable for a debtor to keep a luxury home with a very high monthly mortgage at the expense of the creditors. This issue has not been addressed in our Circuit.
Alternatives If Debtor Isn’t Eligible for Chapter 7 Relief
If the debtor fails the means test or simply has too much disposable income, then there are still a number of options available. The debtor can file for Chapter 13 relief if his or her secured debts are less than $1,081,400 and unsecured debts are less than $360,475.
If the debt levels exceed these amounts, they can file for Chapter 11 relief. Debt Negotiation is also an option in which the attorney can negotiate settlements with the creditors. See my blog post: Options If You Fail the Bankruptcy Means Test .
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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 JUNE 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 Mastic, Patchogue, Commack, West Babylon, Coram, 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.
I am currently in San Francisco where I just attended the annual convention of the National Association of Consumer Bankruptcy Attorneys (NACBA). I write this report from there on May 1, 2010.
[Note: this article was previously published in the May 2010 edition of the Suffolk Lawyer].
[I will soon post a number of photos that I took at the NACBA convention}
Many years ago I discovered how exciting it is to travel across the country to interact with fellow bankruptcy practitioners and learn the latest about strategies for protecting consumer bankruptcy debtors, and tips for running a bankruptcy law office.
Over the course of three days, some of the country’s leading bankruptcy attorneys as well as a number of bankruptcy judges, provide valuable insight at daily programs and seminars.
What I find just as important is trading notes and war stories with other bankruptcy attorneys from across the country and learning about new products and services at the accompanying trade show.
Here Are Some Highlights of the Bankruptcy Convention
New Trend in Interpreting the Means Test
In a half-day program which addressed the means test, the speakers concluded that both the United States Trustee and our country’s bankruptcy judges have become more lenient in interpreting the means test in Chapter 7 cases. There are three reasons for this trend.
Apparently, the current recessionary climate and sentiment against large banking institutions is resulting in the U.S. Trustee bringing fewer Section 707 motions alleging that the debtor filed an abusive case.
In addition, more and more debtors are providing information to the U.S. Trustee’s office in cases where there are means test issues. This enables the U.S. Trustee to evaluate the issue of abuse and reach a conclusion that the U.S. Trustee should not object.
Finally, there seems to be a greater number of experienced bankruptcy attorneys who know what red flags to look out for and consequently these experienced attorneys refrain from filing abusive cases.
Wide-Spread Concern Over Bankruptcy Judge Salaries
Judicial salaries are relatively low. It appears that we are losing a large number of bankruptcy judges because the level of judicial pay is so low. When there is a vacancy on the bench, this causes the bankruptcy court’s entire case load to slow down, which means unhappiness and dissatisfaction to litigants and all others involved.
This was indeed the case just two three years ago here, in the Eastern District of New York. Our Chief Bankruptcy Judge for the district, Hon. Melanie L. Cyganowski, left the bench to pursue a much more profitable position as a partner in a leading bankruptcy firm.
I interviewed Judge Cyganowski at that time and she clearly indicated that her reason for leaving the bench was because of her unreasonably low judicial salary. See: Chief Bankruptcy Judge Melanie Cyganowski Stepping Down.
HAMP Bankruptcy Update
There was ample discussion about President Obama’s Home Affordable Modification Program (HAMP) which seems to be rife with problems as an unusually small percentage of homeowners actually get permanent relief.
Here’s why:
a) there is a major lack of communication on the part of the lender;
b) lenders are continuing to threaten homeowners with foreclosure even as the lender is evaluating the homeowner for a modification, and even if the homeowner has been approved for a trial term; and
c) lenders are arbitrary in granting relief.
On a positive note, however, a new law is going into effect on June 1, 2010 that, among other things, makes it illegal for a lender to discriminate against a bankruptcy debtor because he or she is in the HAMP program.
The new law will also provide certain protections to Chapter 13 debtors as mortgagees will be precluded from objecting to discharge.
Lower Prices for Credit Counseling
When the 2005 Bankruptcy Amendment Act first went into effect in 2005, there were only four approved credit counseling agencies in our jurisdiction (E.D.N.Y.), and they all charged the same rate – $50 per credit counseling session.
There must have been about 20 credit counseling companies exhibiting at the trade show and many now charge fees as low as $15 per session.
In addition, they gave out so much shwag that my ten-year-old son, Max, will be delighted to receive from me upon my return a large number of squeeze toys, flashlights, keychains, fancy chocolates, playing cards, puzzles, T-shirts and what-not that I picked up from these exhibitors.
My hard-working office staff will also be the recipient of a good deal of this booty.
Emerging Technologies for Consumer Bankruptcy Practices
One of the most crowded exhibitor booths belonged to a OTB, an company that created BK Express, a comprehensive practice management system which is designed for consumer bankruptcy attorneys.
I actually just set up my office to use this software which is basically a special shell designed to work on top of LexisNexis’s Time Matters system.
Problems with MERS Mortgages and Foreclosure Defenses
In a very dynamic session, we were told that 50% of all residential mortgages in this country are nominally owned by MERS, which is Mortgage Electronic Registration Systems, a privately held company that operates an electronic registry designed to track servicing rights and ownership of mortgage loans in the United States.
The problem with MERS-recorded mortgages is that MERS really does not own the mortgage, thereby creating an interesting argument that MERS does not have any standing in bankruptcy court.
I previously wrote about special defenses that a homeowner can assert to defend a foreclosure action involving a MERS mortgage. See: A New Powerful Mortgage Foreclosure Defense — Compliments of MERS.
If your client has a MERS mortgage, consider looking at the pooling and service agreement to make sure that there was a true and valid assignment at every link of the chain, including delivery and acceptance of assignment documents. If there was not, you may have a good objection to a MERS proof of claim or motion to lift the stay.
Few Bankruptcy Attorneys From New York
I was rather surprised the very small turn-out from our state. Out of about 1,600 bankruptcy attorneys who attended the convention, there must have been fewer than 20 from New York, and only one other member, I believe, from the Suffolk County Bar Association. That was Allison Shields, who was actually one of the speakers – she spoke on managing a successful bankruptcy practice.
Written by Craig D. Robins, Esq.
In my regular monthly column in the Suffolk Lawyer last month I discussed the difficulties that Congress created by enacting a means test statute that is poorly worded and confusing. (Deciphering the Plethora of Means Test Cases Across Many Bankruptcy Courts).
In this month’s column I will highlight some recent bankruptcy court decisions that shed light on interpreting what is “income” for means test purposes when a debtor receives bonuses, teachers’ salaries or unemployment insurance benefits.
Countering the Lopsided Results of the Means Test
The purpose of the means test is to create a projection of the debtor’s net income and expenses for a period of three to five years after the filing date to see if the debtor would have sufficient surplus funds to make some kind of payment to creditors. In doing so, the starting point is to ascertain what the debtor’s income was during the six-full-month pre-petition calendar period.
When you only look at a six-month period to project the next three to five years of income, you often get a lopsided result. For example, if the debtor received a bonus in the prior half-year, his means test would effectively double this income because the means test would assume that the bonus would be paid every six months.
Conversely, if the debtor waited more than six months after receiving the bonus, the debtor would not even have to count the bonus as income.
Because of this uneven result, bankruptcy attorneys would often have to engage in a strategy of timing the filing. However, it seems that some bankruptcy courts are becoming more logical in their approach to analyzing the statute to provide a more balanced result for all parties.
Annual Bonuses Shall be Pro-rated Over 12 Months for the Bankruptcy Means Test
A recent case from Virginia looked at a debtor who received an annual bonus in the six-month pre-petition means test period. The court held that the bonus should be pro-rated over a 12-month period to determine the amount necessary to calculate the debtor’s “current monthly income.” In re Meade, —— B.R. ——, 2009 WL 4456211 (Bankr. W.D. Va., Nov. 13, 2009).
The court concluded that the language “average monthly income,” which is found in Bankruptcy Code section 101(10A)(A) is susceptible to two interpretations. One of them is the mechanical example I gave above, which can result in either a harsh result to the debtor or a windfall.
However, the court adopted a different, more realistic “common sense” interpretation, which the court said was more in keeping with what appeared to be the overarching purpose of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, namely, to require debtors to make meaningful payments to their creditors if they have the funds to do so.
The court felt that Congress intended for there to be some connection between the compensation received and the period of time in which the applicable services for such compensation were rendered.
With regard to the concept that under any different interpretation, debtors’ attorneys would want to time the filing of their clients’ cases, the judge said, “It is difficult to believe that Congress intended such a result or desired to encourage such tactics.”
A Teacher’s Income Is Not Pro-rated for the Bankruptcy Means Test
The Meade case also addressed the wife’s income, who, as a public school teacher, received her annual salary over a ten-month period.
Here the court took a totally different approach by refusing to pro-rate the wife’s income. The court said that this situation was well within the framework provided by Congress of looking to the income actually received during the six month period prior to bankruptcy as the best measure of a debtor’s ability to pay creditors.
Unemployment Benefits Are Income for the Bankruptcy Means Test
The means test enables a debtor to exclude from income unemployment benefits that are received under the Social Security Act. A recent Illinois case held that unemployment benefits should not be included in this exception to income, and should thus be treated as income for the means test. In re Kucharz, 418 B.R. 635 (Bankr. C.D. Ill., Oct. 28, 2009).
To complicate matters, the court, after provided a highly detailed history of unemployment benefits in this country, cited two cases from 2007 that held to the contrary.
However, the court concluded that unemployment benefits are designed to replace wages, and since wages must be reported on the means test, then so to must unemployment benefits be reported. The court also highlighted the aim of the means test, which is to include income from all possible sources.
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 MARCH 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, West Babylon, Coram, 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.