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The Expenses Step of the Chapter 7 “Means Test”

If your income is higher than “median income,” you may still file a Chapter 7 case by going through the expenses step of the means test.

 

The Easy, Income Step of the Means Test

The last couple of blog posts have covered the first step of the means test, the income step. It says that if your “income”—as that term is uniquely defined in this law—is no more than the published median amount for your state of residence and for your size of family, you can skip the rest of the means test, and you generally qualify for a Chapter 7 “straight bankruptcy” case. You don’t have to go through the rest of the means test.

The Admittedly Complicated, Expenses Step of the Means Test

If on the other hand your “income” is greater than the median income amount applicable to your state and family size, then you have to go through the detailed expenses step to see whether you can participate in a Chapter 7 case.

The Challenge of the Means Test

The concept behind the means test is pretty straightforward: people who have the means to pay a meaningful amount to their creditors over a reasonable period of time should be required to do so. But putting that concept into law resulted in an amazingly complicated set of rules.

These expense rules are detailed and rigid because Congress was trying to be objective. The assumption was debtors would just inflate their anticipated expenses to show that they had no money left over for their creditors—no “means” to pay them anything.

One of the complications is that the allowed expenses include some based on your stated actual expense amounts, while others are based on standard amounts. The standard amounts are based on Internal Revenue Service tables of expenses, but some of those standards are national, some vary by state, and some even vary among specific metropolitan areas within a state. There are even some expenses which are partly standard and partly actual (certain components of transportation expenses).

There are also rules about when to allow and how to determine the allowed amounts for secured debt payments (vehicle, mortgage) and for “priority debts” (income taxes, accrued child support).

If You Have Disposable Income

After all that, if after subtracting all the allowed expenses from your “income” you have some money left over, whether you can be in Chapter 7 depends on the amount of that money and how that compares to the amount of your debts:

  1. If the amount left over—the “monthly disposable income”—is no more than $125, then you still pass the means test and qualify for Chapter 7.
  2. If your “monthly disposable income” is between $125 and $208, then apply the following formula: multiply that amount by 60, and compare that to the total amount of your regular (not “priority”) unsecured debts. If the multiplied total is less than 25% of those debts, then you still pass the means test and qualify for Chapter 7.
  3. If after applying the above formula you can pay 25% or more of those debts, OR if your “monthly disposable income” is more than $208, then you do NOT pass the means test, UNLESS you can show “special circumstances,” such as “a serious medical condition or a call or order to active duty in the Armed Forces.”

THAT’s Complicated!

True enough. So you certainly want to have an attorney who fully understands these often confounding rules and how they are being interpreted by the local bankruptcy judges and the pertinent appeals courts.

If you don’t pass the means test you will instead likely end up in a 3-to-5-year Chapter 13 case. Not only would that mean getting full relief from your debts years later than under Chapter 7, with a similar delay in rebuilding your credit, you may well also end up paying thousands, or even tens of thousands, more dollars to your creditors. It’s definitely worth going through the effort to find a competent bankruptcy attorney to help you, whenever possible, find a way to pass the means test. 

 

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Taking Advantage of the Rigidity of the Chapter 7 “Means Test”

Because of how precisely the amount of your “income” is calculated, filing bankruptcy just a day or two later can make all the difference.

 

Passing the “Means Test”

Our last blog post was about most people passing the “means test” by making no more than the median income for their state and family size. We also made clear that “income” for this purpose has a very broad meaning, by including non-taxable received from irregular sources such as child and spousal support payments, insurance settlements, cash gifts from relatives, and unemployment benefits. Also, we showed how time-sensitive the “means test” definition of “income” is in that it is based on the amount of money received during precisely the 6 FULL CALENDAR months before the date of filing. This means that your “income” can shift by waiting just a month or two, or even by waiting just a few days until the turn of the month (since that changes which 6 months of income is at issue).

Why is the Definition of “Income” for the “Means Test” So Rigid?

One of the much-touted goals of the last major amendments to the bankruptcy law in 2005 was to prevent people from filing Chapter 7 who were considered not deserving. The most direct means to that end was to try to force more people to pay a portion of their debts through Chapter 13 “adjustment of debts” instead of writing them off Chapter 7 “straight bankruptcy.”

The primary tool intended to accomplish this is the “means test,” Its rationale was that instead of allowing judges to decide who was abusing the bankruptcy system, a rigid financial test would determine who had the “means” to pay a meaningful amount to their creditors in a Chapter 13 case, and therefore could not file a Chapter 7 case.

The Unintended Consequences of the “Means Test”

The last blog post explained the first part of the means test: comparing the income and money you received from virtually all sources during the six full calendar months before filing bankruptcy to a standard median income amount for your state and your family size. If your income is at or under the applicable median income, then you generally get to file a Chapter 7 case. If your income is higher than the median amount, you may still be able to file a Chapter 7 case but you have to jump through a whole bunch of extra hoops to do so. Having income below the median income amount makes qualifying for Chapter 7 much simpler and less risky.

Filing your case a day earlier or later can matter so much because of the means test’s fixation on the six prior full calendar months, AND because you include ALL income during that precise period (other than social security). 

So if you receive some irregular chunk of money, that can push you over your applicable median income amount, and jeopardize your ability to qualify for Chapter 7.  

An Example

It does not necessarily take a large irregular chunk of money to make this difference, especially if your income without that is already close to the median income amount. An income tax refund, some catch-up child support payments, or an insurance settlement or reimbursement could be enough. 

Imagine having received $3,000 from one of these sources on October 15 of last year. Your only other income is from your job, where make a $42,000 salary, or $3,500 gross per month. Let’s assume the median annual income for your state and family size is $45,000.

So imagine that now in the early part of April 2014, your Chapter 7 bankruptcy paperwork is ready to file, and you would like to get it filed to get protection from your aggressive creditors. If your case is filed on or before April 30, then the last six full calendar month period would be from October 1, 2013 through March 31, 2014. That period includes that $3,000 extra money you received in mid-October. Your work income of 6 times $3,500 equals $21,000, plus the extra $3,000 received, totals $24,000 received during that 6-month period. Multiply that by 2 for the annual amount—$48,000. Since that’s larger than the applicable $45,000 median income, you would have failed the income portion of the “means test.”

But if you just wait to file until May 1, then the applicable 6-month period jumps forward by one full month to the period from November 1 of last year through April 30 of this year. Now that new period no longer includes the $3,000 you received in mid-October. So now your income during the 6-month period is $21,000, multiplied by 2 is $42,000. This results in your income being less than the $45,000 median income amount. You’ve now passed the “means test,” and qualified for Chapter 7. 

 

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The Easiest Way to Pass the Chapter 7 “Means Test”

Most people considering Chapter 7 “straight bankruptcy” have low enough income to qualify.  Find out if you do.

 

The “Means” Part of the “Means Test”

When Congress passed the last major set of changes to the bankruptcy laws nine years ago, it explicitly said that wanted to make it harder for some people to file Chapter 7.  The idea was that those who have the means to pay a significant amount of their debts should do so. Specifically, those who can pay a certain amount to their creditors within a three-to-five-year Chapter 13 payment plan ought to do so, instead of just being able to write off all their debts in a Chapter 7 case.

How the Law Determines Whether You Have Too Much “Means”

The “means test” measures people’s “means” in a peculiar, two-part way, the first part based on income, the second part based on expenses.

The income part is relatively straightforward; the expense part involves an amazingly complicated formula of allowed expenses.

The good news is that if your income is low enough on the income part of the “means test,” then you’re done: you’ve passed the test and can skip the rest of the test. The other good news is that most people who want to file a Chapter 7 case DO have low enough income so that they do pass the “means test” based simply on their income.

Is YOUR Income Low Enough to Pass the “Means Test”?

Your income is low enough if it is no higher than the published “median income” for a household of your size in your state. You can look at your “median income” on this website (for bankruptcy cases filed on or after April 1, 2014).

A Peculiar Definition of “Income”

Here’s what you need to know to compare your “income” (as used for this purpose) to the “median income” applicable to your state and family size:

1. Determine the exact amount of “income” you received during the SIX FULL calendar months before your bankruptcy case is filed. It’s easiest to explain this by example: if your Chapter 7 case is filed on March 25, 2014, count every dollar you received during the six-month period from September1, 2013 through February 28, 2014. After coming up with that six-month total, divide it by six for the monthly average.

2.When adding up your “income” include all that you’ve acquired from all sources during that six-month period of time, including unconventional sources like child and spousal support payments, insurance settlements, unemployment benefits, and bonuses. But EXCLUDE any income from Social Security.

3. Multiply your six-month average monthly income by 12 for your annual income. Compare that amount to the published median income for your state and your size of family in the link provided above. (Make sure you’re using the current table.)

Conclusion

If your “income”—calculated in the precise way detailed here—is no more than the median income for your state and family size, then you have passed the “means test” and can file a Chapter 7 case.

But if your income is higher than that, you may still be able to pass the “means test” and file a Chapter 7 case. That’s covered in the next blog post.  

 

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When Chapter 7 “Straight Bankruptcy” is Not So Straightforward

How can you tell if your Chapter 7 case will be straightforward? Avoid 4 problems.

 

Most Chapter 7 cases ARE straightforward. Your bankruptcy documents are prepared by your attorney and filed at court, about a month later you go to a simple 10-minute hearing with your attorney, and then two more months later your debts are discharged—written off. There’s a lot going on behind the scenes but that’s usually the gist of it.

But some cases ARE more complicated. How can you tell if your case will likely be straightforward or instead will be one of the relatively few more complicated ones?

The four main problem areas are: 1) income, 2) assets, 3) creditor challenges, and 4) trustee challenges.

1) Income

Most people filing under Chapter 7 have less income than the median income amounts for their state and family size. That enables them to easily pass the “means test.” But if instead you made or received too much money during the precise period of 6 full calendar months before your case is filed, you can be disqualified from Chapter 7. Or you may have to jump through some more complicated steps to establish that you are not “abusing” Chapter 7. Otherwise you could be forced into a 3-to-5 year Chapter 13 case or your case could be dismissed—thrown out of court. These results can sometimes be avoided with careful timing of your case, or even by making change to your income before filing.

2) Assets

Under Chapter 7 if you have an asset which is not protected (“exempt”), the Chapter 7 trustee can take and sell that asset, and pay the proceeds to the creditors. You may be willing to surrender a particular asset you don’t need in return for the discharge of your debts. That could especially be true if the trustee would use those proceeds in part to pay a debt that you want and need to be paid anyway, such as back payments of child support or income taxes. Or you may want to pay off the trustee through monthly payments in return for the privilege of keeping that asset. In these “asset” scenarios, there are complications not present in the more common “no asset” cases.

3) Creditor Challenges to the Dischargeability of a Debt

Creditors have a limited right to raise objections to the discharge of their individual debts. This is limited to grounds such as fraud, misrepresentation, theft, intentional injury to person or property, and similar bad acts. With most of these, the creditor must raise such objections to dischargeability within about three months of the filing of your Chapter 7 case—precisely 60 days after your “Meeting of Creditors.” Once that deadline passes your creditors can no longer complain, assuming that they received notice of your bankruptcy case.

4) Trustee Challenges to the Discharge of All Debts

In rare circumstances, such as if you do not disclose all your assets or fail to answer other questions accurately, either in writing or orally at the trustee’s Meeting of Creditors, or if you don’t cooperate with the trustee’s review of your financial circumstances, you could possibly lose the right to discharge any of your debts. The bankruptcy system largely relies on the honesty and accuracy of debtors. So it is quite harsh towards those who abuse the system through deceit.

No Surprises

Most of the time, Chapter 7s are straightforward. The most important thing you can do towards that end is to be completely honest and thorough with your attorney during your meetings and through the information and documents you provide. That way you will find out if there are likely to be any complications, and if so whether they can be avoided, or, if not, how they can be addressed in the best way possible. 

 

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Advantages of Being in Control of the Timing of Your Bankruptcy Filing

Don’t get rushed into filing bankruptcy when the timing’s not right. Filing at the right time could save you thousands of dollars.

 

Timing Does Not Always Matter Much, But It CAN Be Huge

Many laws about bankruptcy are time-sensitive. And those time-sensitive laws involve the most important issues—what debts can be discharged (written off), what assets you can keep, how much you pay to certain creditors, and even whether you file a Chapter 7 case or a Chapter 13 one.

It is possible that the timing of your bankruptcy filing does not matter in your particular circumstances. But given how many of the laws are affected by timing, that’s not very likely. It’s wiser to give yourself some flexibility about when your case will be filed. If you wait until you’ve lost that flexibility—because you have to stop a creditor’s garnishment or foreclosure—you could lose out on some significant advantages.

Today’s blog post covers the first one of those potential timing advantages.

Being Able to Choose between Chapter 7 and Chapter 13

Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” are two very different methods of solving your debt problems. There are dozens and dozens of differences. You want to be able to choose between them based on what’s best for you, not because of some chance timing event.

To be able to file a Chapter 7 requires you to pass the “means test.” This test largely turns on your income. If you have too much income—more than the published median income for your family size and state—you can be disqualified from doing the get-a-fresh-start-in-four-months Chapter 7 option and be forced instead into the pay-all-you-can-afford-for-three-to-five-years Chapter 13 one.

The “Means Test” Income Calculation

What’s critical here is that income for purposes of the means test has a very special, timing-based definition. It is money that you received from virtually all sources—not just from employment or operating a business—during the six full calendar months before your case is filed, and then doubling it to come up with an annual income amount. For example, if your bankruptcy case is filed on September 30 of this year, what is considered income for this purpose is money from all sources you received precisely from March 1 through August 31 of this year. Note that if you waited to file just one day later, on October 1, then the period of pertinent income shifts a month later to April 1 through September 30.

So if you received an unusual chunk of money on March 15, that would be counted in the means test calculations if you filed anytime in September, but not if you filed anytime in October. If that chunk of money pushed you over your applicable median income amount, you may be forced to file a Chapter 13 case if your bankruptcy case is filed in September. But not if you filed in October because that particular chunk of money arrived in the month before the 6-month income period applicable if you waited to file until October.

Conclusion

Being able to delay filing your bankruptcy in this situation—here literally by one day from September 30 to October 1—allows you to pass the means test and therefore very likely not be forced to file a Chapter 13 case. Being in a Chapter 13 case when it doesn’t benefit you otherwise would cost you many thousands of dollars in “plan” payments made over the course of the required three to five years. Clearly, filing your case at the tactically most opportune time can be critical.

The sooner you meet with a competent attorney who can figure out these and similar kinds of considerations, the sooner you will become aware of them and the more likely problems like the one outlined here can be avoided. 

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A Big Benefit to Owing Lots of Business Debt: Skip the “Means Test” and Qualify for Chapter 7

If you owe more business debt than consumer debt, then you avoid not only the “means test” but also some other roadblocks to a successful post-business Chapter 7 bankruptcy case.

What’s the “Means Test” and Why it Matters?

Bankruptcy law says that if your income is more than a certain amount, you have to pass a “means test” to be able to go through a Chapter 7 case successfully. One way to avoid this “means test” is by having less income than the permitted “median family income.” But the “median family income” amounts are relatively low. If your income is at all above the applicable median amount, you have to go through the “means test,” with a significant risk of being forced into a 3-to-5-year Chapter 13 payment plan instead of three-month Chapter 7 “liquidation.”

Debtors with More Non-Consumer Debts than Consumer Debts

You can skip the “means test” altogether if your debts are NOT “primarily consumer debts.” This way you could be eligible for a Chapter 7 case even if your income is above the median level. Indeed, you avoid other kinds of “presumptions of abuse” as well, not just the formulaic “means test,” but also the broader “totality of circumstances” challenges. Congress has seemingly decided that if your debts are mostly from a failed business venture, you should be permitted an immediate Chapter 7 “fresh start,” regardless of your current income and expenses.

What is a “Consumer Debt”?

The Bankruptcy Code defines a “consumer debt” as one “incurred by an individual primarily for a personal, family, or household purpose.”

The focus is on the purpose for which you incurred the debt in the first place. If you made a credit purchase or took out the loan exclusively, or even mostly, for your business, then it may well not a “consumer debt.” That is a factual question that must be decided separately for each one of your debts.

“Primarily Consumer Debts”?

The Bankruptcy Code does not make this crystal clear, but generally if the total amount of consumer debt is less than the total amount of non-consumer debts, your debts are not “primarily consumer debts.” And then you do not have to mess with the “means test.”

Seemingly Consumer Debts May Not Be

Small business owner often financed the start-up and ongoing operation of their businesses with what would otherwise appear to be consumer credit—credit cards, home equity lines of credit and such. Given their purpose, these may qualify as non-consumer debts in calculating whether you have “primarily consumer debts.” This is definitely something to discuss with your attorney to consider how the local judges are interpreting this issue.

Unexpectedly High Business Debts Can Help

Sometimes business owners have business debts larger than they thought they had, which could push their non-consumer debt higher than their consumer debt. For example, if you had to break a commercial lease when you closed your business, the unpaid lease payments projected out over the intended term of the broken lease could be huge. Or your business closure may have left you with other hidden debts, such as obligations to business partners or unresolved litigation, with tremendous damages owed. The silver lining to these larger-than-expected business debts is that they may allow you to skip the “means test” and other grounds for dismissal or conversion to Chapter 13, allowing you to discharge all your debts through a Chapter 7 case when you could not have otherwise.

 

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Keeping It Simple in a Closed-Business Chapter 7 Case

Using a Chapter 7 case to clean up after closing down your business will be easy or not depending largely on three factors: business assets, taxes, and other nondischargeable debts. These three will usually also determine if you should be in a Chapter 7 case or instead in a Chapter 13 one.

Once you’ve closed down your business and decided to file bankruptcy, you may have a strong gut feeling about choosing the Chapter 7 option. After what you’ve been through, you just want a fresh, clean start. If you’d put years of blood, sweat and tears into trying to get your business to succeed, and then finally had to throw in the towel after resisting doing so for so long, at this point you likely feel like it’s time to put all that behind you. The last thing you likely feel like doing is dragging things along for the next three to five years that a Chapter 13 case usually lasts.

And you may well be ABLE to file a Chapter 7 case. The “means test” largely determines whether, given your income and expenses, you can file a Chapter 7 case. In my last blog I told you that you can avoid the “means test” altogether if more than half of your debts are business debts instead of consumer debts. But even if that does not apply to you, the “means test” will still not likely stand in your way, especially if you just closed down your business recently. That’s because the period of income that counts for the “means test” is the six full calendar months before your bankruptcy case is filed. An about-to-fail business usually isn’t generating much income.

But usually the question is not whether you are able to file a Chapter 7 case, but rather whether doing so is really better for you than a Chapter 13 one.

Many factors can come into play, but the following three seem to come up all the time:

1. Business assets: There are two kinds of Chapter 7 cases: “no asset” and “asset.” In the former, the Chapter 7 trustee decides—usually quite quickly—that none of your assets (which technically belong to your “bankruptcy estate”) are worth taking and selling to pay creditors. Either all those assets are “exempt” from the reach of the trustee, or are not worth enough for the trustee to bother. But with a recently closed business, there are more likely to be assets that are not exempt and are worth the trustee’s effort to collect and liquidate. If you have such collectable business assets, you will want to discuss with your attorney where the anticipated proceeds of the Chapter 7 trustee’s sale of those assets would likely go, and whether that is in your best interest compared to what would happen to those assets in a Chapter 13 case.

2. Taxes: Just about every closed-business bankruptcy seems to involve tax debts. Although some taxes CAN be discharged in a Chapter 7 case, most cannot. Chapter 13 is often a better way to deal with taxes. This will depend on the precise kind of tax—personal income tax, employee withholding tax, sales tax—and on a series of other factors such as when the tax became due, whether a tax return was filed, if so when, and whether a tax lien was recorded.

3. Other nondischargeable debts: Bankruptcies involving former businesses seem to get more than the usual amount of creditor challenges to the discharge of debts. These challenges are usually based on allegations that the business owner acted in some fraudulent fashion against a former business partner, a business landlord. or some other major creditor.  Such litigation, often started or at least threatened before the bankruptcy is filed, can turn an otherwise simple bankruptcy case into a long and expensive battle, regardless whether your case is a Chapter 7 or 13. But depending on the nature of the anticipated allegations, Chapter 13 may give you certain legal and tactical advantages over Chapter 7.

I’ll expand on these three one at a time in my next three blogs. From them you will be able to get a much better idea whether your business bankruptcy case should be in a Chapter 7 or not, and if so whether it will likely be relatively simple or not.

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Getting a Fresh Financial Start After Closing Down Your Small Business

Closing down a business can be messy. A bankruptcy filed to deal with its financial fallout is often more complicated than a normal consumer bankruptcy case. But not necessarily.  In one respect at least, a business bankruptcy can actually be much easier than a consumer one.  

If you’ve owned a small business that you have already shut down, or are about to, you may be afraid of filing bankruptcy because you’ve heard that “business bankruptcies” are terribly expensive and not a good way to wrap up the affairs of a business. In the next few blogs I will address this concern by showing ways that bankruptcy can be a relatively simple and effective solution.

Today I start with a little twist in the “means test” that favors certain former business owners over normal consumers.

The “means test” determines whether you may file a “straight” Chapter 7 case to discharge your debts in a matter of a few months, or instead must file a 3-to-5-year Chapter 13 payment case. Unless you need some of the other benefits of Chapter 13, Chapter 7 is usually preferred because it gets you to a fresh start much more quickly and cheaply.

In many situations, a former business owner will NOT be able to pass the means test and so will be required to go through Chapter 13. For example:

  • If, after closing her business a business owner succeeded in getting a good job before filing bankruptcy, the income from that job may be higher than the “median income” applicable to her state and family size. So she may well not pass the “means test.”
  • If the business was operated by one spouse while the other continued working and earning a decent income, that other spouse’s income alone may bump the couple above their applicable “median income,” again with the result of not passing the “means test.”
  • If a debtor’s income is higher than the applicable “median income,” he may still be able to pass the means test by deducting from his income his actual and/or approved expenses. But a former business owner will not be able to deduct monthly payments to secured creditors on business collateral he is surrendering—vehicles and equipment, for example—or for other business expenses, such as rent on the former business premises. This reduces the likelihood that he will have enough allowed expenses to pass the “means test.”

But here’s the good news for some former business owners: the “means test” only applies if your “debts are primarily consumer debts.” (See Section 707(b)(1) of the Bankruptcy Code.) So if your debts are primarily business debts—more than 50%–you essentially can skip the “means test.”

Careful, because by “debts” the law means all debts, including home mortgages and personal vehicle loans. So your business debts will usually have to be quite high to be more than all your consumer debts.

And to apply this law we must be very clear about the difference between these two types of debts. So what’s a “consumer debt”? The definition may sound familiar: it’s a “debt incurred by an individual primarily for a personal, family, or household purpose.” (Section 101(8).)  So, for example, if you took out a second mortgage on your home a few years ago explicitly to fund your business, the current balance on that second mortgage would not likely be a consumer debt.

Sometimes the line between these is not clear, so this is something you need to discuss thoroughly with your attorney if you want to avoid the “means test” under this “primarily business debts” exception.

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The Far Limits of the Means Test

Very few people who want to file Chapter 7 bankruptcy need to take the means test all the way to its limit. But if you do, you better have some iron-clad “special circumstances” to defeat your “presumption of abuse.”

The means test triggers whether or not your case is presumed to be an abuse of Chapter 7. Each step of the means test gives you a way to avoid this presumption of abuse. So, you avoid the presumption IF ANY of the following apply to you:

1. your income is no more than the median family income for your state and your size of family;

2. your income is more than the applicable median family income, but, after subtracting a list of allowable expenses, your remaining monthly disposable income is less than $117 per month; or

3. your income is more that the applicable median family income, your remaining monthly disposable income is between $117 and $197 per month, AND when you multiply your specific monthly disposable income amount by 60, this total is less than 25% of your “non-priority unsecured debts” (debts not secured by collateral, excluding special “priority debts”—certain taxes, support payments, etc.).

(See my last few blogs about these earlier parts of the means test.)

A large percentage of people who want to file Chapter 7 avoid the presumption of abuse on the first step—having sufficiently low income. Many others do so because their monthly disposable income is low enough at the second step, or their monthly disposable income is low enough in comparison to the amount of their debt.

BUT, if after all this you still have a presumption of abuse, your case will either be dismissed (thrown out) or else changed into a Chapter 13 case (requiring payments to your creditors). Your last chance to avoid this is if you can show “special circumstances.” The Bankruptcy Code lays out this law as follows:

[T]he 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… justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative.

So when pushed to the limit, a test that is supposed to be an objective way to decide who qualifies to file a Chapter 7 bankruptcy comes down to a very subjective question about whether any “special circumstances” apply.

To be fair, much of the means test IS objective, in the sense that it involves a whole lot of number-crunching to see if you can escape that dreaded “presumption of abuse.” But when a lot of those numbers—such as the allowed expense amounts, or the above-mentioned $117 and $195 amounts—appear arbitrary or do not accurately reflect your honest reality, then that “objectivity” has gotten away from the purpose for which it was supposedly intended.

Regardless, if you want to file a Chapter 7 case and, after going through all the steps of the means test, you are among that small minority of people still with a presumption of abuse, how likely are you going to be saved by the remaining subjective step in the process? Will you be able to persuade the judge that your “special circumstances” defeat the presumption of abuse?

This is a prime example of when you want a very experienced and conscientious bankruptcy attorney at your side. Why? Because the ambiguousness of the law, as you saw in the excerpt above, means that your attorney will need to 1) know how the local bankruptcy judges are interpreting this law, 2) carefully apply that to the details of your case when advising you about your options before filing your case, and then 3) if necessary be persuasive in making your case for “special circumstances” in court.  

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When Chapter 7s Are Not So Simple

The goal of most Chapter 7 cases is to get in and get out—file the petition, go to a simple 10-minute hearing with your attorney a month later, and two months later get your debts written off. Mission accomplished, end of story. And usually that’s how it goes. So when it doesn’t go that way, why not?

Four main kinds of problems can happen:

1. Income:  Under the “means test,” If you made or received too much money in the 6 full calendar months before your Chapter 7 case is filed, you can be disqualified from Chapter 7. As a result you can be forced instead into a 3-to-5 year Chapter 13 case, or have your case be dismissed altogether—thrown out of court. These results can sometimes be avoided by careful timing of your case filing, or by making changed to your income beforehand, or if necessary by a proactive filing under Chapter 13. Or sometimes it’s worth fighting to stay in Chapter 7 by showing that it is not an “abuse” to do so.

2. Assets:  In Chapter 7, if you have an asset which is not “exempt” (protected), the Chapter 7 trustee will be entitled to take and sell that asset, and pay the proceeds to the creditors. You might be happy to surrender a particular asset you don’t need in return for the discharge of your debts, in particular if the trustee is going use the proceeds in part to pay a debt that you want paid, such as a child support arrearage or an income tax obligation. But instead you may not want to surrender that asset, either because you think it is worth less than the trustee thinks or you believe it fits within an exemption. Or you may simply want to pay off the trustee for the privilege of keeping that asset. In all these “asset” scenarios, there are complications not present in an undisputed “no asset” case.

3. Creditor Challenges to Discharge if a Debt:  Creditors have the limited right to raise objections to the discharge of their individual debts, on grounds such as fraud, misrepresentation, theft, intentional injury to person or property, and similar bad acts. In most circumstances the creditor must raise such objections within about three months of the filing of your Chapter 7 case. So once that deadline passes you no longer need to worry about this, as long as that creditor got appropriate notice of your case.

4. Trustee Challenges to Discharge of Any Debts:  If you do not disclose all your assets or fail to answer other questions accurately, either in writing or orally at the hearing with the trustee, or if you fail to cooperate with the trustee’s investigation of your financial circumstances, you could possibly lose the ability to discharge any of your debts. The bankruptcy system is still largely, believe it or not, an honor system—it relies on the honesty and accuracy of debtors (and, perhaps to a lesser extent, of creditors). So the system is quite harsh towards those who abuse the system by trying to hide the ball.

To repeat: most of the time, Chapter 7s are straightforward. No surprises. That’s especially true if you have been completely honest and thorough with your attorney during your meetings and through the information and documents you’ve provided. In Chapter 7 cases for my clients, my job is to have those cases run smoothly. I do that by carefully reviewing my clients’ circumstances to make sure that there is nothing troublesome, and if there is, to address it in advance in the best way possible. That way we will have a smooth case, or at least my clients will know in advance the risks involved. So, be honest and thorough with your attorney, to greatly up the odds of having a simple Chapter 7 case.

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