Tag Archives: Means test

What is the median income for Texas?

Bankruptcy restrictions were tightened under the Bankruptcy Abuse Prevention and Consumer Protection Act, which was passed in 2005, and signed by President Bush. One of the main provisions of the law, which took effect on October 17, 2005, was to make it more difficult for high income filers to file Chapter 7 bankruptcy and have some of their unsecured debts immediately discharged.

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Student Loan Expense Not Considered in Means Test

A means test was instituted in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The idea of the bankruptcy changes was to make it harder for serial filers to abuse the system while offering token protection for consumers. Since a student loan is not considered a living expense under the means test, I find the law somewhat obfuscating the intent of protecting consumers. Continue reading

How Incurring Debt Can Help You in a Chapter 7 Bankruptcy

 

It may seem strange to the debtor who is considering filing for bankruptcy protection to hear that incurring debt can help them into a chapter 7 bankruptcy instead of being forced to file a chapter 13. Continue reading

Bankruptcy and Who Might Qualify

 

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Linens 'n Things going out of business at New Hope Commons in Durham, North Carolina. (Photo credit: Wikipedia)

One of the more commonly asked questions on bankruptcy forum websites is: “Do I qualify for Bankruptcy?”

The practical answer to this question can be rather complicated because what most debtors facing bankruptcy are usually asking is whether or not they should file for bankruptcy protection, not if they really qualify. Technically, bankruptcy relief is available regardless of the amount of a debtor’s debts or whether the debtor is solvent or insolvent. Therefore, anyone can file for bankruptcy protection, but the real question is, should you?

There are six different types of bankruptcies you can file depending on your personal financial circumstances. Each type of bankruptcy is designed to meet certain criteria.

The most simple and common type of bankruptcy an individual can file is a Chapter 7 bankruptcy. In order to be able to file this type of bankruptcy, there are specific requirements you must meet before you can file it. You can be an individual, a partnership, corporation, or other business entity to file a Chapter 7.

You are subject to a means test in order to qualify for a Chapter 7. Only those who are at or below the median income level for a family the same size living within your area automatically qualify, or you have to pass the means test to qualify.

Any individual, partnership, or sole proprietor that does not pass the means test can file for bankruptcy relief under a Chapter 13 bankruptcy. Corporations are limited to filing under a Chapter 11 bankruptcy, but sole proprietors, partnerships, and other types of businesses can also choose to file under this Chapter.

An individual cannot file under any Chapter of bankruptcy “if during the preceding 180 days a prior bankruptcy petition was dismissed due to the debtor’s willful failure to appear before the court or comply with orders of the court, or the debtor voluntarily dismissed the previous case after creditors sought relief from the bankruptcy court to recover property upon which they hold liens.” (Uscourts.gov). Also, you cannot file under any Chapter of bankruptcy unless, within 180 days before filing, you have received credit counseling from an approved credit counseling agency in either a group or individual setting.

These are just some of the legal requirements for various types of bankruptcies you can file as a first time filer. Why you might file is a personal matter that only you should decide.

Being insolvent may not be the best or the only reason for filing for bankruptcy protection, but it most likely will certainly influence your decision to file. Protecting yourself against collection activities, lawsuits, foreclosures and the like may also have an overriding bearing on whether of not you file for bankruptcy protection. Having or not having assets to protect can play another role.

Filing for bankruptcy protection is a Constitutional right that is available to anyone in America. You must be the one to ultimately make the decision whether or not to file. It is always a good idea to make the decision to file an informed one, and making an informed decision will likely include getting legal advice from an experienced bankruptcy attorney.

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Tax Refund and How It Might Affect the Means Test

US Real Median household Income

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Means Test and a Chapter 7

Many questions arise on bankruptcy forum websites about the Means Test for determining whether or not a debtor, considering filing bankruptcy, can file a Chapter 7.

The Means Test is a test devised by Congress in the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act. Basically, it is given to those debtors wanting to file a Chapter 7 who do not automatically qualify by being below the median income for a family in the area in which the potential filer lives. If the wannabe Chapter 7 filer is above the median income, they can take the Means Test to determine how much their monthly disposable income is, and if under a certain amount may qualify for filing Chapter 7.

As part of the Means Test, the bankruptcy court considers your average income for the past six months, called the look back period. They look back six months in search of bonus income and the like. Consequentially, income tax refunds usually get the attention of wannabe filers. They want to know how the bankruptcy court might view the refund in relation to the look back period. Their concern is not completely unfounded.

Bankruptcy Law Provides Courts with Leeway

Bankruptcy law in the area of the Means Test provides bankruptcy courts with a lot of leeway in determining conclusions about the look back period. For instance, the trustee might look back and determine the unearned income given to a tax filer is new income that has been refunded to the filer. In that case, the bankruptcy court may use part or all of the refund as income in determining the Means Test.

Most bankruptcy courts do not consider a tax refund as new income. Normally, a tax refund is considered income already declared for Means Test purposes, but again, the bankruptcy court has a lot of leeway in making those determinations. If the trustee handling a bankruptcy case decides a certain portion of a tax refund is new income affecting the Means Test, it will be up to the filer to petition the bankruptcy court for a ruling on the matter by the Bankruptcy Court Judge.

The result of considering a portion of your tax refund as new income might have the affect of moving you into a Chapter 13 bankruptcy in lieu of a Chapter 7. Many courts will not consider looking at the tax refund unless the filer is above the median income.

Even if the tax refund does not put you into a Chapter 13, the refund can still be considered an asset in any type of bankruptcy filed. In a Chapter 7, a tax refund unspent will be regarded as an asset to be exempted or used to pay off unsecured debt.

Spend It, Exempt It, or Lose It

That is why many bankruptcy lawyers will advise their Chapter 7 clients to spend the refund before you file when the possibility exists the refund may not be exemption by state or federal exemptions. One blogger put it this way in regards to a tax refund before filing bankruptcy: “Either spend it, exempt it, or hand it over.”

In any regards, if you are planning on filing a Chapter 7 bankruptcy, check with a bankruptcy lawyer before doing anything with your tax refund before filing.

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Homeowner in Pennsylvania Has Bankruptcy Questions

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The Questions

A homeowner in Pennsylvania shared his personal bankruptcy story in February of 2012 on a bankruptcy forum website. The homeowner has been struggling to make ends meet despite running a construction job on the side to supplement his regular job. Here are three questions the man wants answers to after sharing his financial history:

  1. Since all my money is tied up in expenses, would I qualify to file a Chapter 13?

  2. If I file a Chapter 13, should I buy a newer car for reliability during the five year plan?

  3. Will filing bankruptcy make my current credit score of 540 go down much further, preventing me from getting a new car?

The Financial Situation of the Homeowner

The homeowner stated in his bankruptcy forum blog that he needed to keep his home. While it is true and advantage of filing a Chapter 13 will guarantee you to be able to keep your home, there is the possibility this particular homeowner would be allowed to keep his home anyway if he qualifies to file a Chapter 7 instead.

He owes $178,000 on his primary mortgage on a house currently valued at around $200,000. He owes $43,000 on a second mortgage. He is currently 3 months behind on the primary and one month on the second mortgage. Without filing some type of bankruptcy, it is likely one or the other mortgage company will foreclose on the property for defaulting on their loans.

Since the homeowner lives in Pennsylvania, which allows bankruptcy filers to chose between state and federal exemptions, the homeowner can chose the federal homestead exemption of $21,625 to possibly exempt his home from being liquidated in a Chapter 7 bankruptcy. If he files a Chapter 7, he would still have to get caught up on both his mortgage payments in order to keep the home. This strategy should not be tried without discussing it with an experienced bankruptcy attorney first.

The man’s current take home pay after taxes is approximately $4,350 per month.

Total expenses as described by the homeowner, not including unsecured debt, is approximately $5,225 per month. Obviously, the man appears not to have any disposable monthly income which would possibly qualify him to file a Chapter 7.

His unsecured debt is currently around $24,000.

Possible Answers to the Homeowner Questions

Before the homeowner makes in decisions on what type of bankruptcy he should file in his particular situation, it is highly recommended he hire a bankruptcy lawyer to help him decide what it best for him.

Here are some of his possible answers to the questions he raised:

  1. Yes, the man would qualify for filing a Chapter 13 as long as his business debts have been made as a sole proprietor.

  2. Whether or not he should buy a new car would depend on the monthly cost and if he could afford the payments, but it is likely he could buy the car before filing a Chapter 13 if he and his attorney think it is necessary.

  3. Yes, you should get an initial drop of around 20 to 50 points if your score is around 500. Credit scores rarely drop too far below 500 if you have any credit history at all. By the time the homeowner reached 540, his credit history had already been factored into the score.

Bankruptcy laws can be complicated, and it is wise to consult with an experienced bankruptcy attorney before filing.

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Business Bankruptcy for an LLC

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Understanding a Chapter 7

A Chapter 7 bankruptcy is a liquidation process where a bankruptcy court trustee takes your non-exempt assets, sells them, and then pays off your creditors in a priority order. If there are any debts which have not gotten fully paid, the remainder of the debt is discharged at the end of the bankruptcy. Most Chapter 7 bankruptcies are no asset cases.

A Chapter 7 can be used by individuals, married couples, sole proprietors, partnerships, and certain corporations. When you file a Chapter 7 as an individual, you can file by yourself, with your spouse, as a sole proprietor, and as a sole owner of an Limited Liability Company (LLC). If other people outside your spouse are involved, you can file a Chapter 7 as a partnership, as an LLC with multiple owners, and as a multi-owned corporation.

To qualify for filing a Chapter 7, the total personal household income from employment, income you receive from the business of running a corporation, income of what you make off an LLC, and the income derived from a business partnership cannot be more than the median income for the size of family for your particular area. If it is, you have to pass the Means Test in order to qualify for a Chapter 7.

If your debts are mostly non-consumer business debts, you do not have to pass the means test in order to file a Chapter 7.

Business LLC Owner Shares Bankruptcy Story

One small business owner, a single parent who is the primary owner of an LLC, recently shared his personal bankruptcy story on the internet. The man has been taking home about $15,000 a year from his business since the economy has turned sour. That is his only source of income and has accumulated personal debt after losing his home. His personal debts are less than $10,000 but are growing. His LLC has a business secured loan for $280,000 he is currently making the payments on, and the secured asset has no current equity. He cannot sell the business because the secured property is worth less than he currently owes. He wants to know whether he should file a business Chapter 7 or file as an individual.

Reasons You Might File a Business Chapter 7

There are two reasons you might file a business Chapter 7:

  1. If you have a lot of business assets that could be liquidated to pay off some or all of your liabilities, and you are tired of the business because it is not making enough money. The bankruptcy court can liquidate your assets and end the business.

  2. You may want to file a Chapter 7 business bankruptcy if enough creditors are hounding you with lawsuits and judgments,

A Reason You Might Not File a Business Chapter 7

A reason you might not want to file a business Chapter 7 is if you are underwater on your business and you do not need the scrutiny of the bankruptcy court. You can simply walk away and let your creditors begin the foreclosure process on the secured assets of the business, and when the rest of your creditors see there are no more assets, there only alternative is to file lawsuits against a dead company or what you may be personally liable. If creditors file lawsuit for debts you are personally liable, you can simply file an individual Chapter 7 bankruptcy to have the debts you are liable for discharged. You can also have any lawsuit judgments removed after the debts have been discharged.

An experienced bankruptcy lawyer would be the best person who could actually give you advice as to whether or not you should

file a business Chapter 7.

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Chapter 13 and 7 Great Reasons You Might Want to File

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There are advantages and disadvantages for the different types of bankruptcy you might want to file once you determine the need to file bankruptcy. Here are 7 great reasons you might want to file a Chapter 13 in lieu of any other type of bankruptcy.

Reason #1. To Save You Home from Foreclosure

Once you file for bankruptcy, the automatic stay of the bankruptcy court will kick in for any type of bankruptcy. That means the foreclosure process has to be immediately stopped until the bankruptcy closes or the creditor has won a court petition to lift the stay.

Since a Chapter 13 is a wage earner’s plan, if you catch up on your mortgage payments, you can keep your home through the end of the plan and beyond.

Reason #2. To Reschedule Secured Debts

Secured debts are those debts where you put up the asset you are borrowing money to purchase as collateral. The lender usually places a lien on the title of the asset until the loan is paid in full. You can reschedule the payments during the Chapter 13 plan and catch up on any payments you are behind.

Reason#3. To Consolidate Your Debts Under One Plan

Depending on whether or not you fall under the median income for a family your size in the state you live, you will consolidate all your debts under one monthly payment plan for either 3 or 5 years based on the amount of your disposable monthly income. All unsecured debt at the end of the plan not paid off will be discharged.

Reason #4. To Provide Protection for Co-debtors

A Chapter 13 is an individual type of bankruptcy, and when you file a Chapter 13, all of your co-debtor’s and the assets you hold in common will be protected against seizure, repossession, and foreclosure during the process.

Reason #5. To Extend Certain Tax Obligations

Both state and federal tax obligations can be extended throughout the Chapter 13 plan. They will become a part of the payment plan or certain tax obligations may be extended beyond the plan. In some circumstances, certain tax obligations may also be discharged.

Reason #6. To Extend Student Loans and Other Such Qualifying Debts

Although student loans are exempt from bankruptcy proceedings, unless you can prove an undue hardship, they can be extended until you have completed a Chapter 13. All interest and principal on the student loans can be extended up to the 5 year plan. In certain circumstances, the student loans may be included in the payment plan.

Reason #7. To Qualify for Bankruptcy Relief

If your income is above the median income for a family your size in the state in which you live, and you cannot pass the Means Test, you may not be eligible to file a Chapter 7 bankruptcy. Nevertheless, you can qualify for bankruptcy relief by filing a Chapter 13.

Determining the reasons for whether or not you should file a Chapter 13 can be a complicated process best accomplished with help from a professional like a bankruptcy attorney.

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Is There a Second Means Test at the End of a Chapter 13?

If you are a first time bankruptcy filer, you are going to hear a lot of misinformation about the bankruptcy process. One of the more complicated bankruptcy processes concerns filing a Chapter 13 bankruptcy. A Chapter 13 bankruptcy, usually referred to as a “Wage Earner’s Plan,” is for individuals who could not pass the Means Test, and who have chosen to develop a plan over a three or five year period to repay their unsecured debts.

The Means Test determines whether or not individual filers has the means to pay back a portion or all of their debts. If the filer passes the Means Test, they then have the choice to file a Chapter 7 bankruptcy in addition to the choice of filing a Chapter 13.

Debtors whose income is below the state’s median income are not subject to the means test and automatically qualify to file a Chapter 7. A Means Test calculator is provided to the debtors who are above the median income in their state, and it includes a formula designed to keep filers with higher incomes from filing for Chapter 7 bankruptcy.

It seems the debtor in this personal bankruptcy story has received misinformation about the Means test. The debtor posted this question on the internet in 2011 in a bankruptcy discussion: “We are in our last year of our Chapter 13…I have read somewhere on here about people having to take another type of means test when you get near the end (of finishing the Chapter 13). When does this usually happen?”

There is really no second type of Means Test that I am aware you are required to take. Most likely, what the debtor is alluding to in her question is the second education course she and her joint filing husband are required to successfully complete at the end of a Chapter 13.

The course can be completed online in a matter of hours and usually deals with answering questions about your finances and a personal budget. The court has you complete the course in order to help you overcome similar financial problems in the future.

You must take a certified course and obtain the certification for its completion, and then you must prove to the bankruptcy court you have successfully completed the course by providing the court with the certification. You must get the certification to the bankruptcy court trustee before your final payment of a Chapter 13 bankruptcy. If you are jointly filing, both you and spouse must take the course. When you take the course is up to you as long as it is turned in to the trustee on time.

Filing a Chapter 13 bankruptcy can be legally complicated depending on your particular circumstances. Common sense dictates you might want to consider consulting with a bankruptcy lawyer before you file.

If you are considering filing a Chapter 13 and you live in or around the metropolitan areas of Fort Worth or Dallas, Texas, contact us here today at www.bankruptcyhome.com . We will help you find a bankruptcy attorney in your area that will help you with any questions you may have on bankruptcy law.