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means test

Car Loan Payments in a Chapter 13 Bankruptcy

October 16, 2016 by TomScottLaw

If you will be filing for bankruptcy protection, you have a few options regarding the best way to pay off a car loan or to buy a new vehicle before or during the period of a Chapter 13 bankruptcy.

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Key Points of This Article:

  • If your vehicle loan is over two-and-a-half years old and the remaining loan balance is greater than the car or truck’s current value, Chapter 13 could provide an opportunity to lower the remaining loan amount and interest rate, and then pay the loan off as part of your approved bankruptcy plan monthly payment. The amount you ultimately pay for your vehicle could then be significantly less than your current total loan amount—and you would own the car or truck outright when the case is successfully discharged.
  • If your vehicle loan is less than two-and-a-half years old and the interest rate is already 5% or less, to keep the car or truck you would need to continue to pay off the loan on your vehicle outside of a bankruptcy plan.
  • A sudden need to acquire a new vehicle during an approved bankruptcy plan presents a potential need to submit a request to modify the plan. The trustee of the plan would need to approve that new additional debt as part of your monthly plan payments.
  • A bankruptcy plan trustee’s job is to retrieve money for creditors, so they may consider a monthly vehicle loan payment above a certain amount inappropriate as part of a Chapter 13 bankruptcy plan. If you file for bankruptcy, you may need to switch from an expensive luxury vehicle to a model with lower monthly payments.
  • In addition to your transportation costs, a Chapter 13 trustee will use established federal standards to determine what they consider as your reasonable monthly “cost of living” expenses, including housing, utilities, food, clothing, and out-of-pocket health care expenses.

We recently discussed some aspects of bankruptcy with Christopher Holmes and Jess M. Smith, III, partners at Tom Scott & Associates, P.C. The discussion covered several topics, including the affect of paying off a car loan during a Chapter 13 bankruptcy, buying a new vehicle before or during a bankruptcy, what is a “cram-down,” modifying a bankruptcy payment plan, and means testing. Below is the transcript of that conversation.

 


Q: Does the fact that a debtor who is planning on filing for bankruptcy protection is currently making car loan payments, but the loan will be paid off within a year or two, affect the plan you propose to the bankruptcy court?
Chris Holmes: When I meet with clients in that situation, in a Chapter 13 case where the plan life is anywhere from 3 to 5 years, we weigh the pros and the cons of them either paying for the car directly outside the bankruptcy court versus throwing it into the plan and paying for it over the life of the plan. What we’ll look at is how old is the vehicle loan. If a car loan is more than two-and-a-half years old on the day of filing, and if the payoff on that loan exceeds the fair-market value of the vehicle by a significant amount, then we do this thing we call a “cram-down.” We take the higher payoff and reduce it—cram it down—to what the vehicle is worth. The debtor pays that amount, saving all of that extra principal. Often times, these loans have a very high rate of interest, so we can effectively cram that interest rate down, within the plan, from the high rate to the prime rate plus 1.5%.
As an example, if someone owes $20,000 on a car only worth $15,000, and that loan is supposed to be paid at 21% interest, what we say to the car creditor is that we’re only going to pay the value, $15,000, at perhaps 5% interest through the plan, saving the extra principal and extra interest on that loan. That’s a clear win for the debtor.
If the car loan is less than two-and-a-half years old. we can’t cram the payoff down in value. In that situation, the only thing we can do is reduce the interest rate, so a debtor would payoff the loan through the plan at perhaps 5% interest, to save a considerable amount of interest.
If the loan is less than two-and-a-half years old and the interest rate is already 5% or less, there’s no real advantage to paying it off through the plan, so then we would make arrangements for that debtor to continue to pay on that vehicle outside of the bankruptcy court.
If the bankruptcy plan life is 60 months, but the car loan is going to be paid off in, for example, 36 months, that scenario creates a potential problem. Previously, we would tell the trustee that, when the car was paid in full, the car loan payment would be used to purchase a replacement for that car or maybe a second car for the debtors. The trustees used to accept that at face value, but evidently they have recently learned of too many circumstances, after the car loan was paid in full, in which debtors weren’t using that monthly car payment for the purchase of a replacement or second vehicle. Now trustees don’t trust debtors anymore, so we’re compelled to sign agreements whereby the monthly bankruptcy plan payments increase, for the remaining months of the plan, by the amount that was being paid monthly for the car loan.
In those types of cases, we will go back to the bankruptcy court and ask the judge to allow the debtor to renege on that pledge when the debtor presents to the judge a tentative car loan for a replacement or needed second vehicle. We have the burden to go back into court to request permission to modify the plan back to what we intended, so we can use that extra money for the purchase of another vehicle.
Q: What happens to an individual who has (1) already filed bankruptcy, (2) set-up a plan, (3) their income is such that they are just able to take care of their current bills and monthly payment to the trustee, (4) they haven’t had a car payment during the plan, and then (5) all of a sudden their car breaks down beyond repair and they need to buy a replacement vehicle? Can you modify their bankruptcy plan mid-stream to account for their need to take on a new monthly car payment they did not have before the plan started?
CH: That creates another dilemma, because when we filed the case we submitted a budget that showed all of the debtor’s different monthly living expenses. If the debtor doesn’t have any money allocated for a regular monthly car payment at the start of the plan, the trustee will not approve a loan for that car unless we amend their budget to show the debtor now has the money available for the vehicle loan payment.
What we might have to do is go through the other budgetary items to determine if possibly the debtor is no longer paying so much for child care or perhaps their rent went down. We try to find cuts in their budget. Sometimes, if we don’t find cuts in their monthly budget that equal the amount of the proposed monthly vehicle loan payment, we’ll look at their paycheck to see if they’ve received a cost-of-living adjustment or maybe the withholding for medical insurance has gone down a little bit.
Between a little more disposable monthly income and a few less monthly expenses we night find the extra income needed to pay for the car loan. We’ll then put that amount in an amended budget, submit that to the court along with a copy to the trustee. Then, when the debtor goes to the trustee for permission to the car, the trustee can look at the amended schedule, see that the necessary funds are available each month to pay for the vehicle, and approve the loan.
Q: Would it be in the best interest of someone who was planning on filing for bankruptcy to buy a new car or reliable used car before filing.
Jess Smith III: The bankruptcy code states that we cannot counsel a client to incur new debt on the eve of bankruptcy.
Q: What period of time constitutes “the eve of bankruptcy?” In other words, how much time does someone need to wait between buying a new vehicle and filing for bankruptcy?
CH: I don’t advise clients about that type of activity. What I tell people is that I’ll put $350 in the monthly budget, even though they’re not currently spending that for a car loan, but that they’ll have to go out immediately after filing the case and start shopping around for a vehicle. If the trustee doesn’t receive that request he or she is going to want that $350 each month to give to the creditors.
JS: I told a client to dump his big fancy truck and its $750-a-month payment, which the trustee would think is excessive, and to go get a $350-per-month replacement. The trustee is now demanding proof of that $350 monthly payment, otherwise he is going to want that money for the creditors. We recently met with the creditors, who asked if my client had bought the replacement truck yet. The client said, “No, I need to save my previous monthly payments to accumulate enough money for a down-payment on a replacement.” The creditors stated that unless he does that by the claim bar date, they’re going to ask for that money to go into the plan.
CH: The trustee’s job is to squeeze as much money out of a debtor as possible for the benefit of the creditors.  That’s why they look at projected income and projected expenses. Sometimes they will scrutinize the budget and find there’s some “fat” in it. Maybe we put too much money in there for food or clothes or some other expense—and the trustee will say that’s excessive. We then have to reduce that number to free up some money for the plan payment, which will increase by the amount of “fat” we cut out.
Q: Is there a schedule or chart published by the State of Indiana that shows the average household expenses for a single person, a married couple, and families of different sizes?
JS: There are federal standards (Dept. of Justice Means Testing) that are loosely based on if the IRS is considering going into an installment arrangement with you to pay federal taxes. The IRS publishes amounts they consider to be reasonable for the cost of housing, utilities, transportation, food, clothing, and out-of-pocket health care expenses. The trustees have adopted those figures, but on occasion they’ll take a harder line on a case-by-case basis.
CH: The computer program we use to determine a client’s budget has those regular monthly living expenses built right into it.
Q: Is the IRS standard different for each state?
JS: There are housing allowances listed for each county in every state. For median incomes, the allowances are listed state-by-state, and there are national allowances for food, clothing, transportation, etc.

 

Filed Under: Chapter 13, Vehicles Tagged With: cram-down, cramming, eve of bankruptcy, IRS, lower interest rates, means test

Means Test Helps Determine Filing For Chapter 7 or Chapter 13 Bankruptcy

June 7, 2016 by TomScottLaw

The bankruptcy means test was established by congress as a standard method of calculating the disposable monthly income of a debtor, to help determine the amount paid to the trustee of a Chapter 13 bankruptcy plan.

We recently discussed several aspects of bankruptcy with Christopher Holmes and Jess M. Smith, III, partners at Tom Scott & Associates, P.C. The discussion covered several topics, including the means test, the differences between Chapter 7 and Chapter 13, how divorce and child support can affect bankruptcy, and the discharge process. Below is Part 1 of 4 of the transcript of that conversation.

Q: In a Chapter 13 bankruptcy, how is a debtor’s monthly plan payment amount determined?

Chris Holmes: In a Chapter 13 bankruptcy case, the general rule would be that the debtor must pay to the Chapter 13 trustee all of their disposable monthly income. So, we craft their budget to show how much their projected monthly income will be—gross income minus taxes—and then we calculate what they pay for rent, utilities, food, clothing and all of their living expenses. So, income minus expenses, whatever that difference is, that’s the primary way of determining the monthly plan payment. The bankruptcy code says a debtor must turn over all of their disposable income to the Chapter 13 trustee for the benefit of their creditors. And then, as long as they’re not already paying off 100 cents on the dollar, that’s what they have to pay.

Q: How do factors such as everyday expenses figure into determining what a debtor’s disposable income ends up being?

CH: Whatever their real expenses are or there are some IRS standards that we use on occasion. Obviously, a family of eight has expenses that are greater than a family of three. Jess and I have been doing this for so long, we understand, after putting thousands of budgets together, how far you can push the envelope on a food budget, for example, for a family of four. We know that if we go beyond a certain amount—a sort of comfort zone—that the trustee gives us some pushback and says, “Wait a minute. $1200 a month for two people?” So, for example, they can’t be going out to St. Elmo’s Steakhouse every night for dinner. They have to be reasonable in their budget. We’ve learned over time what a reasonable budget is, based on the household size.

The general rule of whatever is left over goes to the trustee was thrown out the window in a recent case we handled, because the husband had a job and the wife was disabled. She received Social Security benefits. Their combined income, including those Social Security disability benefits, exceeded their living expenses by $660 per month. Before the bankruptcy code changed back in 2005, and really up until just recently, their plan payment would have been $660 a month. However, in this case, our associate attorney Andrew DeYoung said we are only going to offer $250 per month. The concern was that the trustee would ask, “What about the other $410?” However, Andrew understood that there is an area of the law developing where judges have decided that because Social Security benefits are exempt—off limits to creditors—and that they don’t count in the means test that determines household income.

Q: So, Andrew was subtracting the disability payments from the means test equation?

CH: The wife collected about $1600 a month in Social Security benefits. Andrew was just arguing that not all of the couple’s disposable income should be turned over to the trustee, because the disability benefits are intended to provide the wife with a safety net, in case her health deteriorates or an unexpected medical situation arises.

Q: In this case, had both the husband and wife declared bankruptcy?

CH: Yes, it was a joint case. When the trustee asked why I only offered a $250 monthly payment, I stated there is some existing case law that suggests creditors cannot claim bad faith or abuse when debtors do not turn over all of their disposal income, because some of it—not all of it; just the disability benefits—is exempt from creditors. The trustee stated she was also familiar with that case law, so she dropped that disability income from the plan and, to our clients’ pleasure, accepted the $250 per month offered. I asked her if any Indiana judges had ruled on this type of situation or if there are any related 7th Circuit Court of Appeals cases. She stated not to her knowledge. The precedent for this is from some other jurisdiction where crafty bankruptcy lawyers have made this argument and evidently those judges have agreed, so she’s basically taken a position that maybe it isn’t money that she can demand from the debtors.

Q: You mentioned a family of four, which obviously includes children, and a related comfort zone of credible monthly expenses. Is there any entertainment budget that you can justify as not part of that family’s disposable income?

CH: There’s two things. There’s the means test, which looks at average monthly income over the past six months before filing. There’s also certain IRS standards for housing and food and whatever. If I refer to the computer program we use, I can look at how much is deemed to be reasonable for a four-person household. So sometimes when my clients don’t do a really good job on their budget, I’ll go to the means test and use the IRS standards to fill in a blank. Also, if a debtor shows too much money left over, and I know they really don’t have it, I’m going to find some place to use up that money, so they’re not too rich for a Chapter 7 bankruptcy. There are standards for what you can put into the different slots within a monthly household budget.

Q: Where do you find the means test you mentioned?

CH: It’s something that congress established, but our computer program provides all of this information, which is periodically updated. In Indiana, there’s currently a medium income for a one-person household of $43,422.

Jess Smith, III: The medium income varies from state to state.

CH: That’s the starting point. So if I have a family of four and their household gross income per year was less than $74,584, they immediately pass this test. The test is designed to determine if someone has an ability to pay back a significant percentage of their debt through a Chapter 13 plan.

Q: What happens if they fail the test?

CH: They’re ineligible perhaps for a Chapter 7, so we tell them that if they want relief from the bankruptcy code, they’ve got to file a Chapter 13 and offer this disposable income to their creditors.

Q: What happens if that disposable income figure turns out to be zero or just a couple of dollars?

CH: They really wouldn’t flunk the means test in that case. There’s an algorithm in the computer program that looks at what’s left over at the end of the month and what their debt is, and it figures out if you have an ability to pay back a certain percentage of that debt. The program indicates whether they’ve flunked or passed the test; it shows if you’re eligible for a Chapter 7. Sometime you can get around that, because we’re looking at income over the past six months. If the debtor has just lost a job and no longer has that income, we can override the test in a way, or at least show this special circumstance—they’re now destitute and don’t have any money—they’re not required to pay back some of this debt when clearly they don’t have an ability to do that.

Q: So that inability to pay back the debt determines whether you file for Chapter 7 or Chapter 13?

CH: Right. Most people will file for Chapter 7, wipe the slate clean, not make any monthly payments, and be done in three to four months. In Chapter 13, it’s three to five years where they’re making this monthly payment to a Chapter 13 trustee who then divvies up the money amongst the creditors in a certain way. Some people do Chapter 13 because they need it to save a house, to pay taxes, or do some other creative things, but there’s a small percentage of people who are required to file Chapter 13 because they are too rich to just wipe the slate clean. It’s not fair; it’s consider an abuse of the bankruptcy code for somebody who makes $100,000 to just get rid of all their debt.

Q: So that medium income is the number that determines whether you makes too much money?

CH: Right. It’s a starting point. If they’re below that number, they pass automatically. If they’re above that number, then we have to do this more-comprehensive test that looks at not just gross income, but where all of that money goes. Taxes, insurance, rent, food, utilities, car payments, student loans—all of those things. Then, after you plug in all of these numbers, the program shows a green happy face if you pass or a yellow unhappy face if you fail.

Bankruptcy Means Test

There’s a case we filed in which we received the green happy face. We filled in the debtor’s average monthly income and then on the next page it totals it up to $62,580. The median income for a family of this size is $62,431. So, because their combined income was a little bit above the median income, I had to go through the program and fill in additional fields, for example car payments and mortgage payments. There are certain standards, for example for a two-person household with two cars it’s $424 per month for gas, oil, and routine maintenance on a vehicle. At the very bottom of this test, in this particular case, we come up with this number for Disposable Monthly Income, which we call “DMI” and here it’s “minus $371.” So, clearly in this case they don’t have any money left over. That’s why the program gives us the green happy face, because it concluded that even though their income is above median income, because of all of their expenses, there is no money left over for the creditors. So they qualify for Chapter 7. Now if this had been a yellow unhappy face, and the DMI had been a significant positive number, then we would have to say to the debtor that the case would get thrown out or threatened with dismissal, so we just know that we have to file as a Chapter 13. Then they’re in this plan for 60 months, five years, to pay back as much of their debt as possible.

JS: And there are certain things that are not deductible on a Chapter 7 means test that are deductible on a Chapter 13 means test.

Q: Such as?

JS: Such as retirement account contributions or 401(k) loan repayments. Going back to the Social Security issue, the code says that, if you have a habit of making retirement contributions, you’re supposed to be able to continue those under this means test. Then you put your budget together going forward. Our associate Andrew DeYoung had a case where he tried to schedule the ongoing contributions, because she had done them within the six months. But he received a creditor objection and Judge Graham said, “I’m not going to allow you to keep socking away this kind of money while paying very little on your debt.

CH: Even though they’re in a Chapter 13, they get credit for it.

JS: Correct. She had a very low Disposable Monthly Income number under the means test, but when it came before the judge, the judge said this doesn’t pass the smell test. If the client were to appeal, maybe the client would have won, but the client didn’t have the resources to appeal.

Q: Was it because the IRA contribution was too high?

JS: It was substantial. Plus, evidence came out that the debtor worked for a university. If she contributed some phenomenal amount of money, her employer would match it with about 20% of the contribution. So this woman was trying to put away $9000 to $10,000 a year, hoping to get another $3000 to $4000 match. It was not the trustee who objected, it was an individual creditor who had loaned the debtor money and who spent enormous resources objecting to the proposed plan. I don’t know that every judge would have sided with the creditor, but this particular one did.

Q: So the judge threw out the IRA contribution entirely or forced her to lower the payment?

JS: She was in a Chapter 13, so the plan Andrew offered met the means test. But the creditor started objecting with old law—pre-2005 case law—and Andrew and I did not believe the creditor could win because it was such old case law.

CH: But it was an extraordinary amount of her income that she was contributing.

JS: Yes, it was about 15%, so a substantial portion of her income was being deferred.

CH: I’ve told people that if their contribution is 4%, or 6%, or even 8%, that no one is going to squawk. But if it’s 10% or more, that’s probably where it wouldn’t pass the smell test.

JS: In this case, the debtor was trying to only pay about $7000 on over $100,000 debt, so the judge said, “You’re not going to walk out of here with a fat 401(k).”

CH: This case illustrates the situation where you go to law school and think the law is black and white. You’re going to learn how to solve problems and there are definite rules. But the law is actually shades of gray. It’s almost never black and white. One judge might say, “That seems reasonable,” and another judge might say “It’s unreasonable.” It’s unpredictable, especially in state court law, where you go to one county and have one judge rule one way, then you go to another county, with the exact same facts, and another judge might rule a different way. Clients always ask, “Can you predict the results?” But that’s next to impossible, because you just don’t know how that judge on that day is going to interpret those facts in light of the law. Sometimes I’ve had judges where it was not what they knew that I was afraid of, it was what they knew that just wasn’t so. They thought that they knew the law, but they didn’t and they interpreted the law improperly. But you can’t go to the judge and imply they’re wrong. The only way you can do that is to appeal and most people we represent don’t have the financial ability or resources to appeal a decision, because that’s really expensive and time-consuming. The case mentioned earlier is a good example of the gray shades of the law and it’s fluidity, because by offering a plan with only a $250 monthly payment, instead of $660 a month, Andrew saved our client $24,600 over the life of the five-year plan.

Part 2 of Conversation: Differences Between Chapter 7 Bankruptcy and Chapter 13 Bankruptcy

Part 3 of Conversation: Divorce and Child Support Can Impact a Bankruptcy

Part 4 of Conversation: Being Discharged From Bankruptcy

Filed Under: Chapter 13, Chapter 7, Debt to Income Ratio, Exemptions, Medical Bills Tagged With: 401k, 7th Circuit Court of Appeals, Disposable Monthly Income, DMI, IRA, IRS, means test, Social Security

Disqualification: Overview of Bankruptcy – Chapter 13 and Why to File, Part 1

February 27, 2014 by TomScottLaw

Series: #6 0f 13
In our previous article, we took an overview of Chapter 7 bankruptcy, and how it is handled in Indiana, an “opt out” state where residents take exemptions found under state law. In this installment, we will discuss why a debtor may not be eligible to file for a Chapter 7. Future articles will look at other reasons to file a Chapter 13 rather than a Chapter 7 Bankruptcy.

What is Chapter 13 Bankruptcy?

As mentioned in the last post, Chapter 13 is commonly described as the “adjustment of debts of an individual with regular income” or a reorganization of one’s finances through a plan approved by the court. Three key components to a Chapter 13 plan are eligibility (whether a debtor is entitled to file a Chapter 13 under the limitations set forth in Section 109(e)), feasibility (whether a debtor can fund a payment plan which complies with Section 1322 and 1325), and good faith (as set forth in Section 1325 – Confirmation of plan*(a)(3)).
Per 11 U.S.C. Sec. 109*(e), there are limitations as to how much debt an individual having regular income can have to be eligible for Chapter 13.
Except for a stockbroker or a commodity broker, and individual and his spouse may have up to $336,900.00 of noncontingent, liquidated unsecured debt and non-contingent, liquidated, secured debts up to $1,010,650.00. [NOTE: These figures will adjust up to $360,475.00 and $1,081,400.00 respectively in April 2010.]

Why file a Chapter 13? You may not qualify for Chapter 7 Relief.

  1. The debtor is not eligible to receive a Chapter 7 discharge. As discussed briefly above, a debtor may not receive a discharge of debts under Chapter 7 of the Bankruptcy Code if the debtor has received a discharge in Chapter 7 or 11 in a case commenced within eight years before the date of filing the petition.In addition, a debtor may not receive a discharge of debts under Chapter 7 of the Bankruptcy Code if the debtor has received a discharge in Chapter 12 or 13 in a case commenced within six years before the date of filing the petition. See 11 U.S.C. §§ 727 – Discharge*. Maybe the first question to ask the debtor is whether she has ever filed for bankruptcy before.The attorney should also review the Public Access to Court Electronic Records (PACER) for information on previous filing dates and whether the debtor received a discharge or whether the case was dismissed.
  2. Filing Chapter 7 would be abusive to Chapter 7 provisions. In a nutshell:
    • If the debtor’s average “current monthly income” minus expenses reasonable and necessary (as defined by 11 USC § 707*(b)(2)(a)(i)-(iii)) leaves less than $6,575.00 ($109.00 per month), then there is no automatic presumption of abuse.
    • If the resulting figure leaves more than $10,950.00 ($182.50 per month) then there is an automatic presumption of abuse. If the resulting figure is anywhere between the two numbers, then there is a presumption of abuse if that figure would pay at least 25% of the non-priority unsecured claims (if the debtor has more debt, then there is less likelihood of abuse!). Note that the figures increase every three years on April 1.
    • The next adjustment is April 1, 2010. According to the Federal Register, Volume 75, Number 37 (February 25, 2010) the increased figures will be $7025.00 ($117.08 per month) for no abuse and $11,725 ($195.41 per month) for presumption of abuse.

    [We are not going to try and explain the provisions of the Section 707(b) means test in the limited space of this article because a reasonable explanation would likely take pages. Entire seminars have been given on the means test requirements, and Section 707(b) is very likely the section that has created the most litigation across the country. For more information on the topic, read 11 USC § 707 – Dismissal of a case or conversion to a case under chapter 11 or 13*.]

Next: Curing a Mortgage: Overview of Bankruptcy – Chapter 13 and Why to File, Part 2

* Source: Cornell University Law School Legal Information Institute

Filed Under: Chapter 13, Personal Bankruptcy in Indiana Tagged With: debt adjustment, means test, reorganization

Income & Assets: Basics of Bankruptcy – Chapter 13 vs. Chapter 7 – Part 1

October 13, 2013 by TomScottLaw

In this second installment of our series “Basics of Bankruptcy,” we discuss reasons to file a Chapter 13 bankruptcy rather than the less complex Chapter 7 bankruptcy.

WHY FILE CHAPTER 13 ANYWAY?

When considering to file bankruptcy, the first decision that probably should be made is whether you should file either a Chapter 7 or Chapter 13 bankruptcy. There are several reasons why a debtor should (or must) file a Chapter 13 bankruptcy, including (but not necessarily limited to):

  1. Not eligible for a Chapter 7 discharge
  2. Above-Median debtor
  3. Debtor does not want to liquidate assets
  4. Curing a mortgage
  5. Cramming a mortgage
  6. Stripping
  7. Cramming a car
  8. Cramming other personal property
  9. Lowering interest rates on cars (and other collateral)
  10. Liquidating tax debts
  11. Protecting a co-debtor

In this post, we will look at the first three reasons above to choose Chapter 13. The remaining reasons will be covered in parts 2-4 of this series.

Not Eligible for a Chapter 7 Discharge.

Summary: A person cannot file for Chapter 7 bankruptcy within eight year of previously filing for Chapter 7 or Chapter 11, or within six years of filing for Chapter 12 or Chapter 13 protection.

Not Eligible for a Chapter 7 Discharge (opens in new window)
Click for US Code, Title 11, Chapter 7, Subchapter II, Section 727

Pursuant to US Code, Title 11, Chapter 7, Subchapter II, Section 727(a)(8)*, you (the debtor) are not eligible for a Chapter 7 discharge if you were granted a discharge in a Chapter 7 or Chapter 11 bankruptcy in a case that began within eight years before the date of the new bankruptcy filing.
Further, Section 727(a)(9) states that the debtor will not be eligible for a Chapter 7 discharge if the debtor was granted a discharge in a Chapter 12 or Chapter 13 bankruptcy filed within six years of the new filing (unless the plan payments paid 100% of allowable claims or paid 70% of such claims and the plan was proposed in good faith and was the debtor’s best effort).
Thus, an individual who received a discharge in a Chapter 7 bankruptcy six years prior would either have to wait two more years or file a Chapter 13 bankruptcy.

Above-Median Debtor

Summary: The court may dismiss an individual consumer debtor’s case filed under Chapter 7 if the debtor’s household income is greater than the median income for a household of the same size.
Filing Chapter 7 would create abuse.
Pursuant to Section 707(b)*, the court may dismiss an individual consumer debtor’s case filed under Chapter 7 if it finds that the granting of relief would be an abuse of the provisions of Chapter 7.

  • If the debtor’s household income is greater than the median income for a household of the same size, then the court shall presume abuse exists if current monthly income minus the means test standardized expenses leaves at least $182.50/mo (or $10,950.00 for 60 months).
  • If the net result is greater than $109.58/mo ($6,575.00 for 60 months), but less than the $182.50 figure, then there shall be a presumption of abuse if the net figure times sixty is at least 25% of the debtor’s general unsecured debts. In other words, if the debtor has incurred large amounts of debt, then the debtor may actually be more likely to get a discharge in a Chapter 7.
  • The presumption of abuse may only be rebutted by demonstrating special circumstances “such as a serious medical condition or a call or order to active duty in the Armed Forces, to the extent such special circumstances that justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative” [See Section 707(b)(2)(B)(i)].

Debtor does not want to Liquidate Assets

Summary: Debtor may protect those assets that they do not want to have liquidated by filing for Chapter 13 bankruptcy protection rather than Chapter 7.
Under a Chapter 7 bankruptcy, the duty of the trustee is to “collect and reduce to money, the property of the estate for which the trustee serves” [Section 704(a)*].
If, after utilizing all applicable exemptions for your client, there remains an asset that may be properly liquidated and your client desires to retain such assets, your client may protect those assets by filing for Chapter 13 bankruptcy protection.
As stated in Section 1325(a)(4)*, the court shall confirm a plan if the value of property to be distributed under the plan is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under Chapter 7 of this title.
In our next post, we will discuss mortgage curing, cramming, and stripping, methods employed to help reduce debt.

* Source: Cornell University Law School Legal Information Institute

Filed Under: Chapter 13, Chapter 7, Exemptions, Personal Bankruptcy in Indiana, Property & Asset Protection, Questions About Bankruptcy Tagged With: debtor, discharge debt, lower interest rates, means test, standardized expenses

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4036 Madison Ave.
Indianapolis, IN 46227
Phone: 317-786-6113

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Indianapolis, IN 46219
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  *Disclosure required by 11 U.S.C. § 528(a)(3): We, the law office of Tom Scott & Associates, P.C., are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.
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