The type of bankruptcy that most people want to file is a Chapter 7 Bankruptcy. However, the right to do so it not without limits. The Bankruptcy Code under Section 707 (b) gives the court the authority to dimiss a Chapter 7 Bankruptcy if it is determined that to grant a discharge would be an abuse of its' provisions. It is important to keep in mind that Section 707 (b) applies only to debtors whose debts are primarily consumer debts. These are the type of debts that have been incurred primarily for personal, family or household purposes.
MEDIAN INCOME DETERMINES WHETHER A PERSON MUST PROCEED THROUGH THE MEANS TEST
To determine whether a person will be required to proceed through the means test, it will first be necessary to calculate their median income. A person's median income is calculated by taking the average of the gross earnings from the previous six months prior to the month of the bankruptcy filing. This includes income received during that time period from all sources, including income that may no longer be received. Such sources would include income from: 1) gross wages, salary, tips, bonuses, overtime, commissions, 2) alimony and maintenance payments, 3) net income from operation of a business, profession or farm, 4) net rental or other property income, 5) interest, dividends and royalties, 6) pension and retirement income, 7) regular contributions to household expenses, 8) unemployment compensation (The courts are rather undecided in this particular area, as some courts have held that unemployment benefits are received under the Social Security Act and therefore are not income. Other courts have held that such benefits are income. The Western District of Pennsylvania has generally taken the position that such benefits are not income. Nevertheless, you are required to report the receipt of these benefits on the means test form, but if you contend that they were a benefit received under the Social Security Act, then such benefits can be listed as not to be counted as income.) and 9) income from all other sources. It should be pointed out that benefits received under the Social Security Act are excluded. Such benefits excluded would be: 1) benefits paid to a child, 2) social security benefits including SSD/SSI, 3) public assistance, 4) medicaid funds used to care for disabled individuals and 4) funds received through block grants to provide states with funds to provide various social services. If a joint case is filed, then the median income includes all income received by the debtor and the debtor's spouse. However, if a debtor who is married files alone, then the non-debtor spouse's income is not included if it is not available to be used toward the household expenses of the debtor. Ohterwords, expenses that the non-debtor spouse has that do not contribute to the household expenses can be backed out. Also, the income of a separated spouse is not to be counted if only one spouse files. If your income is below a certain median income standard, then it is not necessary to take the means test and one can proceed to file a Chapter 7 Bankruptcy. Sometimes in order to fall below the median income level it may be necessary to hold off on your filing for a month or two. For every month that you hold off on filing, one month drops off of the six month period and another month is added on. Whether a person's income is above or below the median income is often determined by the size of the household. The size of the household is to be determined at the time of the filing of the petition. For purposes of bankruptcy, the size of the household is not limited by the number of dependents claimed for tax purposes, but is more on a case by case basis such as the average number of members in the household that are dependent on each other. Otherwords, non-related individuals in the household can be counted. The median income figures are based on the gross income for a particular household size and currently are:
a) $53,067 for a household size of one
b) $63,687 for a household size of two
c) $78,953 for a household size of three
d) $93,645 for a household size of four
e) $8,400 can be added for each member of the household that is excess of 4
If your median income for your size of household is above the income limits, then it is necessary to proceed through the means test. The means test is designed to determine whether a debtor has the ability to pay back their creditors in full or at least to a certain extent. If such a determination is made, then a presumption of abuse arises. Even though the debtor may be above the median income limits it is still possible to pass the means test.
EVEN IF THE DEBTOR IS REQUIRED TO PROCEED THROUGH THE MEANS TEST IT IS STILL POSSIBLE TO PASS THE MEANS TEST THROUGH THE USE OF VARIOUS TYPES OF DEDUCTIONS FROM GROSS EARNINGS
In proceeding through the means test there are certain deductions for various types of expenses that are allowed. The debtor is allowed to deduct those national standards or expenses allowed by the IRS. These amounts have already been predetermined by the IRS, but the debtor may deduct the full amount, even though they may not actually spend that amount. Those deductions fall within the following categories:
1) food, clothing and other items, housekeeping supplies, personal care products and services and miscellaneous items. The debtor is allowed an adjustment of five percent in this category if the debtor can document that such adjustment is reasonably necessary;
2) out-of-pocket health care allowance. Again, a certain amount of expense has been predetermined by the IRS, but if an additional amount needs to be claimed that is in excess of the standard allowance, then this additional amount can be claimed as an "other necessary expense". These out-of-pocket health care expenses are in addition to any expenses incurred by the debtor to pay for health insurance;
3) housing allowance which is based on the county resided in, household size and is divided into housing and utilities allowances for non-mortgage expenses and for mortgage or rent expenses. Sometimes a debtor may have utility payments or operating expenses that exceed the amount allowed for the non-mortgage housing allowance allowance. In that particular case, an additional deduction for "home energy costs" that are in excess of the IRS standard can be taken, as long as documented to be reasonably necessary. The debtor can also deduct his or her mortgage payment as a component of the housing allowance. If the debtor feels that the IRS local standard for housing is is insufficient, then an additional amount can be claimed. However, a debtor should be prepared to substantiate any additional expenses;
4) transportation expenses. These allowances are divided between operating expenses and ownership or lease expenses. These expenses are for no car, one car and two cars. However, it should be pointed out that oftentimes the courts have allowed debtors to take deductions for the number of cars they own, even though this deduction may exceed two cars. Should the debtor's vehicle be older than 6 years or have mileage in excess of 75,000 miles, then an additional operating expense of $200 per month may be claimed. The operating costs portion of the IRS local transportation standards are based on regional and metroplolitan statistics for particular areas. The other component of the IRS transportation expense is the ownership allowance. The ownership expesne is an IRS national standard that is a set figure no matter where the debtor resides. A certain ownership allowance is permitted even though the debtor's remaining car payments divided by sixty are less than the allotted amount. Otherwords, the debtor is still allowed to claim the full allowance. Even in those situations where the car payment exceeds the allowance, the debtor can deduct the excess as a secured debt payment. The timing of the filing can be important, as the IRS ownership allowance cannot be claimed if there are no remaining loan or lease payments due on the loan. If the debtor's remaining balance on his or her car loan is rather insignificant, with as little as only one payment remaining due, the entire allowance may still be claimed. Another section of the IRS transportation expense is a deduction that the debtor may take for a public transportation expense. Even in situations where the debtor owns a car, but also uses public transportation, the debtor may still take the public transportation expense in addition to the operating and ownership allowances.
The IRS deductions are predetermined standards that do not take into consideration the debtor's actual expenses. However, the debtor can deduct actual expenses under "other necessary expenses.
1) taxes. This includes the total monthly amount that will be paid for federal, state and local taxes. Such items would include income taxes, self-employment taxes, social security taxes and medicare taxes. Any tax refund that is received must be taken into consideration from the total monthly amount that is withheld from your income to pay for taxes;
2) involuntary deductions. This would include any monthly mandatory payroll deductions that are required from your employment. Such items or deducions would include those for certain retirement accounts, union dues, uniforms, etc. The courts have held mandatory deductions to be those for which the failure to pay would be likely to result in the loss of the debtor's employment. Any voluntary deductions would not be allowed. For instance, contributions to a 401(k) would not be permitted. However, loan repayments on a 401(k) loan would be permitted;
3) term life insurance. The total monthly premiums that you pay for your term life insurance may be deducted. If a joint petition is filed, then the amounts for both spouses' term insurance premiums may be deducted. No other deductions are allowed. You may not deduct the expenses for a non-filing spouse or any dependents;
4) court-ordered payments. This would include the total monthly amount paid for alimony, spousal or child support. Any amounts for past due payments are not to be deducted, as they are considered priority claims that are deducted elsewhere on the means test. Any amounts that are court-ordered for other items, such as restitution, etc. may be deducted also. This would exclude any amounts of payments that are made without any legal obligation;
5) education for employment or challenged children. Any monthly amount that is paid for education that is required for your employment or for a dependent special needs child if no public education is available that provides such needed services;
6) childcare. This would include any monthly amount for such items as babysitting, daycare, nursery and preschool. Any amounts for elementary and secondary education may not be deducted;
7) additional health care expenses, excluding insurance costs. This would include the monthly amount that you pay for health care that is required for the health and welfare of you or your dependents. Included would be any out-of-pocket expenses that are not reimbursed by insurance. This would exclude any amounts paid by health insurance or a health savings account. These expenses are for expenses not already claimed elsewhere on the means test;
8) telephone and telephone services. This would include any monthly amount that you pay for such items as pagers, call waiting, caller i.d., special long distance or business cell phone use. These items must be necessary for the health and welfare of you and your dependents or for the production of income and that have not been reimbursed by your employer. Payments that you make for basic telephone service, internet and cell phone service are not to be included since they have already been deducted elsewhere on the means test. Oftentimes many of these expenses have already been deducted as self-employment expenses to arrive at self-employment income and therefore should not be deducted.
THE BANKRUPTCY CODE PROVIDES A LIST OF EXPENSES THAT ARE IN ADDITION TO THOSE COVERED BY THE IRS GUIDELINES
In addition to the expenses allowed under the IRS guidelines, the Bankruptcy Code provides a series of additional expenses that can be deducted from a debtor's current monthly income. Such catorgories include:
1) health insurance, disability insurance, and health savings account expenses. This includes the monthly expenses for health insurance, disability insurance, and health savings accounts to the extent that they are reasonably necessary for you and your spouse or dependents;
2) continued contributions to the care of household or family members. These are monthly expenses that are incurred to pay for the reasonable and necessary expenses to care for and support an elderly, chronically ill or disabled member of your household or a member of your immediate family (parent, grandparent, sibling, children or grandchildren) who are unable to pay for such expenses. To qualify for this deduction, these expenses must have a historical basis in which they have previously been incurred, are actual expenses not simply anticipated and are reasonably necessary not merely elective;
3) protection against family violence. This would include monthly expenses that are reasonably necessary to maintin the safety of the debtor and his or her family, as outlined under the Family Violence Prevention and Services Act;
4) additional home energy costs. This would include any additional amount that is incurred in excess of the amount that has already been allowed elsewhere on the means test. The excess amount may be deducted, but it will be necessary to provide the trustee with the documentation showing the actual expense and that it is reasonable and necessary;
5) education expenses for dependent children who are younger than 18. This includes the monthly expense of up to $160.42 or $1,925.04 annually that you pay for the private or public elementary or secondary school education of a dependent child under the age of 18. It is necessary to provide documentation to the trustee that will show the actual expenses and that they are reasonable and necessary and have not already been claimed elsewhere on the means test;
6) additional food and clothing expense. This includes the monthly amount that your actual food and clothing expenses are in excess of the combined food and clothing expenses allowed by the IRS National Standards. The amount that can be deducted is no more than 5% of the food and clothing allowance allowed in the the IRS National Standards. In order to find the amount allowed it will necessary to look at a chart showing the maximum allowance. Also, the debtor must show that these expenses are reasonable and necessary;
7) continuing charitable contributions. This is the amount that you contribute to a religious or charitable organization by cash or other financial means on a regular basis. Such amount is limited to 15% of the debtor's gross income.
A SEPARATE EXPENSE DEDUCTION IS ALLOWED FOR PAYMENTS ON SECURED DEBTS
The debtor may deduct the average monthly payments made on secured debts. This amount is calculated by taking the total amounts that are "contractually due" in the remaining 60 months following the filing date of the petition divided by 60. Such items as mortgage payments and automobile loan payments would be allowed regardless of how much those payments were. Any mortgage payment would include any escrow portion as well, but taxes and insurance that are not escrowed should likewise be deducted. Secured payments would also include any payments that are secured by personal property, such as appliances or other items. The deduction for such expenses may be taken as long as payments are "contractually due". There is no exception due to the fact that the property is subject to a lien that might be avoided or that the property might be surrendered. This deduction on secured debts can be taken in addition to those deductions that are allowed by the IRS. However, the debtor should be careful to avoid any double counting. For instance, a deduction for a secured payment on a home may be taken, even if the total amount of the expense exceeds the IRS housing mortgage payment that is allowed. The debtor is permitted to take the deduction of the larger of the mortgage allowance or the secured debt payment. The debtor should approach cars in the same manner. Oftentimes, the amount allowed by the IRS transportation ownership allowance may exceed any secured payments remaining on any vehicle loan, but the larger of the two amounts is allowed to be taken. The debtor may also deduct any other secured payments that are necessary to maintain the debtor's possession of the debtor's primary residence, motor vehicle, or other property necessary for the support of the debtor or the debtor's dependents. Again, the monthly amount is calculated by taking the remaining secured payments over the 60 months following the petition filing date divided by 60. Such payments would include: 1) any mortgage arrears, which would include any charges and attorney's fees, 2) arrears on car loans, plus any fees, 3) any arrears on any other secued property, 4) arrearage payments or other liens on such property and 5) amounts on cross-collateralized debts.
A SEPARATE EXPENSE DEDUCTION IS ALLOWED FOR PAYMENTS ON PRIORITY DEBTS
The debtor may also deduct the average monthly payments on priority debts. This amount is also calculated by taking the total amount of those debts entitled to priority and then dividing by 60. Such debts entitled to priority would include:
1) priority taxes, and
2) domestic support obligations (This would include such obligations as child and spousal support, as well as those support debts assigned to a governmental unit. Sometimes payments for private school tuition, college tuition or other types of expenses for dependents or non-dependents may be fashioned to be in the nature of support and therefore court ordered), and
3) priority drunk driving debts.
Again, it is necessary to be careful and avoid double counting.
THE DEBTOR MAY CLAIM DEDUCTION FOR A CHAPTER 13 EXPENSE
Assunming that the debtor is eligible to file a Chapter 13 Bankruptcy, which most likely would always be the case, then the debtor would deduct the actual administrative expense that would be incurred in a Chapter 13 case in their particular district. The amount that can be taken has been linited to 10% of the projected plan payments. This would require contructing a hypothetical Chapter 13 Plan, which would include any payments made to secured creditors, priority creditors and any payments that would be required to be made to unsecured creditors that has been calculated by the means test.
DETERMINING WHETHER A PRESUMPTION OF ABUSE ARISES
Once a debtor has calculated their income and taken all of the allowed deductions, then a determination is made as to whether the debtor has passed the means test and can proceed to file a Chapter 7 Bankruptcy or whether a presumption of abuse arises. A presumption of abuse arises if the debtor's current monthly income after all monthly allowed deductions, multiplied by 60, is the lesser of $12,850 or 25% of general unsecured debt., as long as that 25% is at least $7,700.00. For instance, debtors who have $49,900.00 or more in general unsecured debt, a presumption of abuse arises if the amount is $12,850.00 or $214.17 or more per month and debtors who have less than $29,900.00 in general unsecured debt, a presumption of abuse arises if the amount is $7,700.00 or $128.33 or more per month. A debtor who finds themselves having between $29,900.00 and $49,900.00 in general unsecured debt, a presumption of abuse arises if the amount is 25% or more of the general unsecured debt.
In the event that a presumption of abuse arises, the U.S. Trustee will most likely file a motion to dismiss or to convert the case. Under those partcular conditions, the debtor can rebut the presumption of abuse by showing special circumstances, such as a serious medical condition or a call or order to active duty in the Armed Forces. The standard is basically one of reasonableness, therefore much discretion is left with the court. Otherwords, there must be shown a need for an adjust in income or expenses that would cause the debtor to fall below the abuse levels set by the means test. A reduction in income or some other type of monetary disruption would be the most obvious special circumstance to rebut the presumption. Special circumstances can also be shown by additional expenses in which there is "no reasonable alternative". Such expenses might include high communting costs, increased price of gas, security costs in dangerous neighborhoods, etc.