Sunday, June 17, 2012

Can you qualify for a Chapter Seven Bankruptcy in Flint or other places, 810-235-1970


Your Consumer bankruptcies under Chapter 7 of the Bankruptcy Code give you the debtors a discharge from most unsecured debts, provide for an automatic stay against collection efforts on those debts, and permit debtors to have a fresh start after discharge.

In Chapter 7 bankruptcy if you make below the median gross income for your sized family you qualify for chapter seven. If above a process called a Means test is applied and you may still qualify to file chapter Seven Bankruptcy.

The Bankruptcy Code  recently overhauled the eligibility requirements for filing a Chapter 7 bankruptcy case. Most notably, a means test  was instituted under 11 USC 707(b)(2)(A). The means test determines the ability of a potential debtor to pay back his or her debts in a Chapter 13 case and permits the court to dismiss or convert a Chapter 7 case if granting relief would be abusive after application of the test.

The process of passing the means test begins by looking at the debtor’s income and comparing it to the annual median income of a household the same size as the debtor’s household.

The term current monthly income (CMI) is defined by the Code as “the average monthly income, from all sources, that the debtor receives (or in a joint case the debtor and the debtor’s spouse receive)” in the preceding six-month period ending on the last day of the last calendar month. 11 USC 101(10A). CMI includes any amount paid by any entity other than the debtor (or, in a joint case, the debtor and the debtor’s spouse), on a regular basis for the household expenses of the debtor or the debtor’s dependents (and, in a joint case, the debtor’s spouse if not otherwise a dependent).” Id.

After the six-month average is calculated, it is multiplied by 12 and compared with the applicable state’s annual median income for a household of the same size as the debtor’s household according to the U.S. Census Bureau.  If the debtor’s annualized income falls below the annual median income, there is no presumption of abuse and the debtor will be able to continue with a Chapter 7 case. 11 USC 707(b)(7)(A). If the CMI is above the annual median income, further calculations must be performed to determine whether the debtor has passed the means test and qualifies for bankruptcy under Chapter 7.

If married and filing single your spouse’s income is included. Since your non filing spouse pays for some expenses that spouses income is used in this analysis. In the case talked about  here today the Bankruptcy Trustee lost in an attempt to dismiss the bankruptcy because of how the means test was calculated.

The case here is called In the Matter of Wilson Travis Chapter Seven 06-43456 in an opinion written by Judge Marci McIvor published 11/06/2006.

In this case the non filing spouse  was the sole supporter for her mother, daughter and grandchild before and after marriage to the debtor. She brought some debt to the marriage and the marital estate,both of them, accumulated additional debt.

After filing single not joint  the debtors schedules  showed both of their incomes and took a variety of expense calculation to bring in the debtors income under the maximum allowed in a chapter 7 bankruptcy filing without triggering a presumption of abuse condition. The trustee disagreed.

Congress thought it important that debtors show they do not have the means to pay their debt. This process of proving is called a means test. A number of elements are involved in this means test. One is the family size  the debtors was five.

The debtors calculation , in Travis, created an expense called a marital adjustment  which brought him under the wire . The trustee disagreed with its calculation.

The debtors non filing spouse showed a number of expenses . Again her income is used because  she is responsible for her portion of the living expenses.  A resident of the debtors home his mother in law had an income of monthly $450.00.

The debtor had consumer debt  of $29,000.

The trustee claimed double dipping and argued the appropriate means test would show an abuse of discretion. The argument simply put was that since she is counted as a member of debtors residence there by raising the bar of allowed net income why should her expense be allowed to drive down that same income. The trustee said that she cannot deduct food utulity clothing and personal items when the debtor has already done that.

Not all issues are discussed here.

What then is the monthly income of a bankruptcy petitioner.  It is “ The average monthly income from all sources that the debtors received without regards to its taxability. “ Why is the non filing spouse's income used.  The code further states income is “ any amount paid by any entity other than the debtor...on a regular basis for household expenses of the debtor. “.

The spouses income is listed but reduced by the amount not used for household expenses. This is a fact specific analysis subject to interpretation.

Possibly the court thought this was not clear so they provided and example.  If the spouse has substantial income and spends it on luxury items, houses and cars are these household expenses of the debtor.

In chapter 7 cases such as here the non filing spouse's income is looked at if the trustee files a motion for substantial abuse.  Because of this process the courts have and obligation
to look at  the marital adjustment closely.

The court found that the extent the non filing spouse contributed to food and utilities these are clearly contributions to house book expenses. The court excluded the spouses expenses for clothing and personal items.

The amount the debtor can deduct for  gross income for food clothing , utilities, and  personal items is determined  by local and national standards based upon the number of members in the household. The debtors allowable expenses are then fixed.

Expenses must fall within certain limits and categories. Expense limits are governed by one of four financial standards: national standards, local and national standards for transportation, local standards for housing and utilities, and other necessary expenses. 11 USC 707(b)(2)(A)(ii)(I). National standards set limits on expenses for food, housekeeping supplies, apparel and services, personal care products and services, and miscellaneous.  

Out-of-pocket health care expenses are also provided for in the national standards. These expenses include medical services, prescription drugs, and medical supplies (e.g., eyeglasses, contact lenses). IRM Elective procedures, such as plastic surgery or elective dental work are generally not allowed. Id.

A debtor may exceed national standard limits by 5 percent for food and clothing if the excess is reasonable and necessary.11 USC 707(b)(2)(A)(ii). If the debtor is seeking to exceed the national standard, all expenses should be itemized and documented, including particular special circumstances that make the expenses reasonable and necessary. Further, the debtor should use the IRM national standard expense amount instead of entering the actual expense incurred. IRM

Transportation expenses are divided into two categories: ownership costs and operating costs. IRM Operating costs include maintenance, public transportation, repairs, insurance, fuel, registrations, licenses, inspections, and parking and tolls. IRM The categories are broken down by census region and metropolitan statistical area. IRM If a debtor lives in an area outside of the metropolitan statistical area, a regional standard will apply. Ownership costs, on the other hand, consist of nationwide figures for monthly loan or lease payments. Id. Under ownership costs, separate amounts are provided for the first car and second car. IRM Where the car is collateral, the amount of car payment must be subtracted from the amount provided by the national transportation standards for ownership. Id. The remaining balance, but not less than zero, is the allowable ownership cost under the national transportation standards for ownership. Id.

Housing and utilities standards are established for the county level in each state. IRM

This standard accounts for different family sizes. Two, three, and four family households are specifically provided for and all households over the size of four receive a set amount for each member exceeding four. Similar to the transportation standards, housing and utilities standards are split into two categories: mortgage or rent payment and maintenance, and utilities. IRM

Mortgage or rent expenses include mortgage or rent payments, property taxes, homeowner’s or renter’s insurance, interest, homeowner dues, and maintenance. IRM

Utilities expenses include gas, electricity, water, fuel oil, bottled gas, wood and other fuels, garbage collection, septic cleaning, and telephone and cell phone service when used as the primary phone service. Id. Debtors are allowed the standard amount for housing and utilities or the amount actually spent, whichever is less.

If the amount claimed is more than the total allowed by housing and utilities standards, the debtor must provide documentation to substantiate those expenses are necessary. IRM

Homeowners must make an additional step in the means test to properly calculate their mortgage cost. A housing payment, including principal and interest, real property tax, and insurance payments required by the mortgagee must be subtracted from the amount provided by the mortgage expense. The balance, but not less than zero, is the allowable mortgage/rent expense. Id.

Finally, the debtor is allowed “other necessary expenses” for the categories specified in 11 USC 707(b)(2)(A)(ii)(I).

These expenses must provide for the health and welfare of the debtor and/or the debtor’s family or be incurred in the production of income. IRM

All expenses should be itemized and documented, including particular special circumstances that make the expenses reasonable and necessary. For “other necessary expenses,” you should be able to demonstrate that there is no reasonable alternative. Examples of “other necessary expenses” include child care; dependent care for an elderly, chronically ill, or disabled household member or member of the debtor’s immediate family, 11 USC 707(b)(2)(A)(ii)(III); taxes; health care; court-ordered payments; life insurance; union dues; professional association dues; involuntary deductions; and disability insurance for self-employed individuals.

In contrast the non filing spouse does not have a cap on these expenses. The spouse simply defines them as expenses and the non filing spouse can deduct them from gross income.

The court found using this approach to deductions there was no abuse of discretion. In Travis the means test was calculated appropriately.

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