Debtor Requirements Under New Laws
I. MEANS TESTING
INDIVIDUALS WITH ENOUGH INCOME TO FILE CHAPTER 13 MAY BE INELIGIBLE TO FILE CHAPTER 7. Certain individuals may no longer be eligible to file Chapter 7 under the new Bankruptcy Code if they earn sufficient income to make payments to Creditors under a Chapter 13 Plan. The purpose of the Means Test is to evaluate whether you have enough disposable income, after subtracting certain allowed expenses and required debt payments, to make payments to Creditors under a Chapter 13 Plan.
“CURRENT MONTHLY INCOME”. The first step in determining your eligibility to file Chapter 7 is to figure out your “Current Monthly Income”. Current Monthly Income is defined as the Debtors’ average monthly income from all sources during the 6-MONTH PERIOD prior to the date of commencement of the case. Current Monthly Income includes income paid by an entity on a regular basis for household expenses. Current Monthly Income excludes all social security benefits and compensation paid to victims of war crimes and domestic or international terrorism.
- Spouse’s income in non-joint cases. The income which will be compared to the median income in the state will include income of a non-filing spouse, unless the spouses are legally separated or living separately and the debtor files a statement under penalty of perjury. [Section 707(b)(7)] A non-filing spouse’s income is not specifically included in the Means Test itself. [Section 707(b)(2)(A)(i)]
- Current Monthly Income and self-employed individuals. Presumably, “income from all sources” includes business or self-employment income. In calculating business or self-employment income, expenses incurred to produce the income are generally deducted. However, expenses which the new Bankruptcy Code allows to be deducted for the Means Test has no specific provision for self-employment. Section 707(b)(2)(B)(i) allows adjustments for “such special circumstances that justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative”.
- Alternative calculation of 6-month period. If the Debtor did not file the schedule of current income required by Section 521(a)(1)(B)(ii), (which it almost always is), income is to be calculated from the 6 month period ending on the date on which current income is determined by the Court.
- Section 101(10)(A) and (B). Current Monthly Income is defined in the new Bankruptcy Code at Section 101(10)(A) and (B).
COMPARE YOUR CURRENT MONTHLY INCOME WITH THE MEDIAN INCOME IN YOUR STATE. Once you’ve calculated your Current Monthly Income, multiply it by 12 and compare it to the median income for your state. You can find median income tables, by state and family size, at the website of the United States Trustee at www.usdoj.gov/ust. Select “Means Testing Information” on this site.
- Means Test may not be necessary. If your Current Monthly Income is less than or equal to the median, you need not proceed further with the Means Test. You are eligible to file Chapter 7!!! If your Current Monthly Income is greater than the median, however, you must pass the Means Test in order to file Chapter 7.
PERFORMING THE MEANS TEST – SUBTRACT CERTAIN EXPENSES FROM CURRENT MONTHLY INCOME. To ascertain whether you will pass the Means Test and qualify to file Chapter 7, subtract the following expenses from your Current Monthly Income:
- Secured debt (such as car loans), due over five years, divided by 60;
- Mortgage or vehicle arrearages to be cured in a Chapter 13 plan, divided by 60;
- Priority debts (such as taxes, child support, alimony), divided by 60;
- Allowed expenses permitted by the IRS in its financial analysis standards;
- Other actual expenses as permitted by the IRS;
- Health insurance, disability insurance, and health savings account;
- Charitable contributions up to 15% of the debtor’s income;
- 5% allowance for food and clothing (requires Court approval);
- Actual monthly costs of caring for an elderly, ill or disabled family member, even if not a dependent;
- Chapter 13 administrative expenses not to exceed 10%;
- Up to $1,500 annually ($125 per month) per child under 18 for public or private school expenses;
- Additional costs for utility expenses.
SCORING THE MEANS TEST. If your total income, after subtracting the above items, is less than $100, you pass the Means Test, and you will be allowed to file for Chapter 7. If your total remaining monthly disposable income is more than $167, you have flunked the Means Test and you will be prohibited from filing Chapter 7 but not Chapter 13. If your remaining monthly disposable income is between $100 and $167 and is sufficient to pay more than 25% of your unsecured, nonpriority debts (credit card bills, student loans, medical bills, etc.) over a five-year period, you flunk the Means Test. If not, you pass the Means Test and Chapter 7 is an option.
II. DOCUMENT PRODUCTION REQUIREMENTS
SECTION 521(a)(1)(B) PRODUCTION REQUIREMENTS. Debtors filing bankruptcy under the new laws much file the following documents at the time they initiate their bankruptcy case:
- Attorney Certificate. A certificate of an attorney or petition preparer showing that the debtor was given an informational notice as required by amended Section 342(b)of the Code.
- Proof of Income. Copies of all payment advices or other evidence of payment (such as pay stubs) received by the debtor from any employer of the debtor if received within 60 days before the filing of the petition;
- Monthly Net Income. A statement of the amount of monthly net income, itemized to show how the amount is calculated; and
- Anticipated Changes in Income. A statement disclosing any reasonably anticipated increase (not decrease) in income or expenditures over the 12-month period following the date of the filing of the petition.
- Educational IRA. File with the court a record of interest in an educational individual retirement account.
PRODUCTION OF TAX RETURNS OR TRANSCRIPTS.
- Debtors must provide copy of most recent tax return. Section 521(e)(2)(A) requires that each debtor, at least seven days prior to the 341 meeting, provide to the trustee and any creditor making a timely request, a copy of the debtor’s federal income tax return or a transcript of the return for the period for which the return was most recently due and for which the debtor filed a return. The failure of the debtor to produce the return or transcript requires dismissal of the case unless the debtor can demonstrate that the failure was “beyond the debtor’s control”.
- Debtors may be requested to provide copies of tax returns becoming due while case is pending, or due within three years before case was filed. Section 521(f)(1)-(3) require individual debtors to file, at the request of the Court, the US Trustee or a party in interest, a copy of any federal income tax return (or transcript of the return), at the same time the return is filed with the IRS for any tax year ending while the case is pending and for any tax year ending during the three years before the case was filed. The requirement includes copies or transcripts of any amendments to such returns.
- More tax returns required under Section 1308 (in Chapter 13). All tax returns for the four years prior to filing the petition must be filed with the taxing authorities if there is a filing requirement. If not filed by the 341 Meeting, the 341 Meeting may be held open by the Trustee for up to 120 days. The Court can provide a 30 day extension beyond the date set by the trustee upon a showing the failure to file was beyond the debtor’s control, and after notice and a hearing.
III. CREDIT COUNSELING AND DEBTOR EDUCATION
CREDIT COUNSELING REQUIRED. An individual cannot file Chapter 7, 11 or 13 unless he or she has received individual or group credit counseling (including telephone or internet) during the 180-day period preceding the date of filing bankruptcy. [Section 109(h)] Individuals must receive such counseling from certain approved, non-profit budget and credit counseling agencies. The clerk of the Bankruptcy Court maintains a list of approved credit counseling agencies which are authorized to offer the required pre-bankruptcy credit counseling in the State of Utah. At the present time, none of the approved agencies have offices within the State of Utah, and their services are available only by telephone or internet. The fee presently being charged for this credit counseling is between $30 and $50 which individuals must pay.
The credit counseling agencies are required to perform two tasks:
- They must outline the opportunities for available credit counseling; and
- They must assist the debtor in performing a budget analysis.
Note that there is no requirement that individuals attempt a debt repayment plan outside of bankruptcy; but only that the agency outline opportunities for such and perform a budget analysis.
Prior to filing their bankruptcy case, individuals must file with the court a certificate from the credit counseling agency that describes the services provided and a copy of a debt repayment plan, if one was created.
FINANCIAL MANAGEMENT COURSE IS ALSO MANDATORY. In addition to credit counseling, all debtors must complete a financial management instructional course within 180 days AFTER they initiate their bankruptcy case. Unless debtors participate in such a course, their debts will not be discharged (eliminated) in bankruptcy. The clerk also has a list of approved financial management instructional courses.
NO INFORMATION CONTAINED HEREIN IS INTENDED TO CONSTITUTE LEGAL ADVICE, AND IS NOT APPLICABLE TO ANY SPECIFIC SET OF FACTS, ESPECIALLY AS TO ANY INDIVIDUAL’S PERSONAL SITUATION. THE INFORMATION CONTAINED HEREIN NOR THE PERUSAL OF IT DOES NOT ESTABLISH NOR CONSTITUTE AN ATTORNEY-CLIENT RELATIONSHIP WITH HUNTSMAN LOFGREN & ASSOC. OR ANY OF ITS ATTORNEYS. THE INFORMATION SET FORTH ABOVE IS BASED ON NEW BANKRUPTCY LAWS WHICH BECAME EFFECTIVE OCTOBER 17, 2005 KNOWN AS THE BANKRUPTCY ABUSE PREVENTION AND CONSUMER PROTECTION ACT OF 2005 (BAPCPA). BECAUSE OF THE COMPLEXITY OF THE NEW LAWS, PLEASE REFER TO THE ACTUAL BANKRUPTCY CODE AND RULES AND/OR CONSULT WITH A BANKRUPTCY PROFESSIONAL TO EVALUATE THE APPLICATION OF THE ABOVE INFORMATION TO YOUR SPECIFIC SITUATION.