What Makes the Means Test “Mean”?

The most notable change of Bankruptcy Reform in 2005 and probably the most criticized was the inception of the Means Test. A Debtor can no longer fill out a simple expense form and show they cannot pay their debts. They must now qualify using standard expenses from data tables provided by various government agencies with various collection practices.

Debtors often express that these expense tables are unfair, out-dated, inaccurate, and that when comparing households, one size does not fit all. When Means Test results prohibit the filing a Chapter 7 bankruptcy, I have gone through the form line by line, listening to clients vehemently argue that the expenses they are required to use are substantially lower and don’t represent an average household.

The test was supposedly created to prevent bankruptcy abuse, and force those that can pay, to pay. The institution and purpose of the test doesn’t really have any bite without the data that really determines your outcome. So where does this “mean” data come from?

Very simply put, the monthly amount a Debtor can afford to pay to creditors is calculated as follows: The Debtor’s average monthly income is reduced by a set of allowed expenses specified by Internal Revenue Service (IRS) and compared to similar households based on data from the Census Bureau. What remains is considered income available to pay back debts. (Again, this is very simply put.)

Part of the IRS standards called the national standards, comprised of food, housekeeping supplies, apparel and services, personal care products and services, and miscellaneous, are derived from data collected by the Bureau of Labor Statistics (BLS) Consumer Expenditure Survey (CES). The CES randomly selects households to voluntarily participate and states that each household surveyed actually represents as many as 15,000 other household. This data was primarily collected for use in calculating the Consumer Price Index (CPI), a key indicator in the country’s inflation and overall economic health, not for use determining ability to pay debt back. The BLS web site actually explains why some of their expense data may be lower than it really is! “Because not all consumer units purchase each item during the survey period, the average expenditure for an item is generally considerably lower than the expenditure by those consumer units that purchased that item.” (From http://www.bls.gov/cex/csxfaqs.htm#q13)

The figures provided by the Census Bureau for state median household income, which your household is compared against, comes from their annual “American Community Survey”. The survey randomly selects 3 million addresses each year to participate, with around 2 millions responses, to answer questions about demographic, housing, social, and economic information. The data that is currently used in the means test was collected in 2010. There is a movement that this survey is a violation of the right to financial privacy which causes one to question if the sample of those that actually fill this out is truly random, and who they really being compared to.

As reminded by the CES Survey, the intent of collecting this data by the various agencies is not for bankruptcy purposes, so pointing a finger in their direction is a bit unfair. But that doesn’t change that these improperly applied statistics are what makes the means test so “mean”.

To read more about The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, visit http://www.justice.gov/ust/eo/bapcpa/index.htm, or read the actual text at http://www.gpo.gov/fdsys/pkg/PLAW-109publ8/pdf/PLAW-109publ8.pdf

For detailed information on the means testing data and collection practices, visit the following sites:

National Standards – http://www.irs.gov/businesses/small/article/0,,id=104627,00.html

State Median Family Income –  http://www.census.gov/hhes/www/income/data/statemedian/index.html Bureau of Labor Statistics (BLS) Consumer Expenditure Survey (CES) – http://www.bls.gov/cex/home.htm

The Law Offices of Keith D. Collier won a great victory in court this year litigating against the United States Trustees office. This new ruling by Judge Paul M. Glenn in the Middle District of Florida, Jacksonville Division allows a debtor to take the deduction for secured property that is being surrendered in their Chapter 7 bankruptcy case.  

The cases can be reviewed by clicking on the following links:

IN re Rivers, Case No.: 3:11-BK-2440-PMG

http://pacer.flmb.uscourts.gov/pdf-new/55246156.pdf

http://pacer.flmb.uscourts.gov/fwxflmb/opn/dcs.fwx

This reaffirms a prior decision by Judge Funk.

 In re EARTHA EVELYN NORWOOD-HILL, Case No.: 08-426-PMG

 http://pacer.flmb.uscourts.gov/pdf-new/45051718.pdf

http://pacer.flmb.uscourts.gov/fwxflmb/opn/dcs.fwx

Repossession, Garnishments, Foreclosures and Bankruptcy

Foreclosures, Short Sales and Bankruptcy

Are homeowners association dues or condo dues dischargeable in bankruptcy? Yes but there are nuances to this answer. If you file chapter 7 bankruptcy to surrender a property you are discharged from your liability under these dues that were incurred prior to filing the chapter 7 bankruptcy. However, you could still liable for any dues or assessments that come due after the bankruptcy filing date.

So how do you get a fresh start from your debt if you are still liable for these dues and fees after surrendering a home or condo in bankruptcy? Generally, these fees and dues are cleared up once the property is taken out of your name. This can be achieved by signing a deed in lieu of foreclosure or when the bank actually forecloses on the property. There is a state statute that holds the property owner liable for taxes, condo or HOA dues or nuisance liens that are assessed on a piece of property. You are still the property owner as long as your name is on the deed. The only way your name can be taken off the deed is to have someone else put their name in its place. Again, this can be done either by the bank foreclosing or signing a deed in lieu of foreclosure. The bankruptcy only discharges the dues and fees that are accrued prior to filing the bankruptcy, it does not take your name off the deed.

Because banks are reluctant to accept a deed in lieu of foreclosure if you are still liable on the debt I advise my clients to file chapter 7 bankruptcy to discharge their liability under the debt and then keep the property maintained and the dues and fees paid after filing if they are still living in the property until the foreclosure sale. During this time you can live for free and not pay the mortgage but you need to pay the HOAs and cut the grass.

For the client that has already moved or wants to move out of the property, I advise calling the bank after filing the bankruptcy and asking for a deed in lieu of foreclosure. The banks are more responsive once the bankruptcy has been filed because they can’t hold you liable for the debt anymore and the deed in lieu is less expense than your lender hiring a foreclosure attorney. If this doesn’t work, these types of debt will be cleaned up once the house is sold in foreclosure. The main problem today is it’s taking longer and longer for banks to actually foreclose.

If you are simply behind on your dues and you want to keep your property, filing chapter 13 bankruptcy will allow you to catch up on your due and save your property. If you want to talk further about getting out of debt or your specific case, e-mail me at collier@keithdcollier.com or call me at 904-981-8100.

First things first . . . the recent credit bust and changes in the housing market has caused many financial institutes and mortgage lenders to be merged or bought out. Since lenders have different interpretations as to when a 1099-A and/or 1099-C should be issued, a lot of the paperwork is currently in a mess. That said, it is always a good idea to notify your bankruptcy attorney as well as your tax accountant when you receive either IRS form. 

Generally speaking, the IRS requires a creditor (such as your mortgage lender) to issue a 1099-A when a borrower abandons real or personal property. This is a common occurrence for homeowners who file a chapter 7 bankruptcy prior to a foreclosure sale. So, at some point following the trustee’s discharge, you may or may not receive a 1099-A in the mail. It is important to understand that this does not represent a forgiveness of debt by the creditor but simply notifies the IRS of the “abandonment of property”.           

When a financial institution files a 1099-C, it is an official notice to the IRS that they have forgiven or cancelled a debt of $600 or more. The difference in the amount you owed and the foreclosure sale price (often shown as Fair Market Value or FMV) creates a tax liability that is considered to be income. At this point, you are required to report this amount to the IRS. However, if the cancelled debt is on your primary residence, the Mortgage Forgiveness Debt Relief Act allows your tax accountant to file a Form 982 and exclude this amount.

 Although Florida is a recourse state, once a lender has filed a 1099C, it would be unlikely that the financial institution would ever pursue you for the deficiency. Unfortunately, mortgage banking paperwork will still be in a mess for a while and stranger things have happened. So, protect your legal position by working closely with your Jacksonville bankruptcy attorney and provide your tax accountant copies of tax-related forms in a timely manner. If you have not already filed bankruptcy and are facing foreclosure, contact the Law Offices of Keith D. Collier for your FREE consultation at 904-981-8100.

Sample Facts and Figures

Client has a primary house with a first and second mortgage. The value of the house is $120,000.00. The first mortgage is $900.00 a month with property taxes and insurance and $130,000.00 is owed. Client is current on the payments. The second is $500.00 a months and $65,000.00 is owed. Debtor has a car that was purchased 2.5 years ago and owes $20,000.00 and the car is valued in at $12,000.00 and has a payment of $600.00 a month. Client has $25,000.00 in credit card debt minimum payment each month of $625.00.

Before Chapter 13 Bankruptcy the client spends $2,625.00 a month on debts.

Once we file the chapter 13 the client will pay the 1st mortgage directly to the first mortgage company. Since the house is valued at less than what is owed on the first mortgage we can strip the second of the property and that debt becomes unsecured. Since the vehicle was purchased over 2.5 years before filing the chapter 13 we can cram the vehicle down to the value of $12,000.00 and pay it over the next 60 months at 4%-6% interest. After reviewing the client’s net income of $3,000.00 a month and his necessary living expenses of $2,500.00 a month we are able to get him a chapter 13 plan payment of $500.00 a month. This payment will be made to a chapter 13 Trustee who then pays his vehicle and his attorneys fees each month. The unsecured debts which are comprised of the second mortgage, $65,000.00, credit cards, $25,000.00 and the deficiency balance owed to the crammed down vehicle of $$8,000.00, all totaling $$98,000.00 will get the rest. In this case very little or approximately $9,900.00 in total.  The rest of the $98,000.00 is discharged.

Before Chapter 13 Bankruptcy the client spends $2,625.00 a month on debts.

After filing bankruptcy the client spends $900.00 on the first mortgage and $500.00 and his car and other debts = $1,400.00.

This is a reduction of over $1,225.00 a month and an overall saving in over $105,000.00.

Chapter 11 and Rental Property

Chapter 11 Bankruptcy is a great way to knock out a lot of the negative equity in rental properties.  An example of a resent case we filed had 10 rental property’s located in Jacksonville Florida, Orlando Florida and Miami Florida. Since the person lived in Jacksonville we filed them in our Jacksonville office. The chapter 11 allowed us to cram down each house based on the present values and we averaged about 4.75%fixed rate over a 25 year period.  This allowed the person to cover the principle, interest, property taxes and property insurance with the money they were receiving in rent.  Some property’s had a surplus that helped with less performing properties and with repairs.

Tax Refunds and Chapter 7 Bankruptcy

When you file Chapter 7 bankruptcy, a Trustee is appointed to your case. The Trustee’s job is to look for assets. One asset a lot of clients or their attorneys overlook is a tax refund.

A tax refund is money that you overpay to the government through the previous year. Taxes are taken out of your pay each pay period and sent to the government to cover your tax debt at the end of the year. When the amount that accumulates is more than what you owe for the year, you receive a refund of what you overpaid. This refund will be taken from you by the Trustee unless you can exempt the money or prove that it is not an asset of the bankruptcy estate.

Any money that you pay to the government before filing the Chapter 7 bankruptcy case is an asset of the bankruptcy estate. Any money you pay after you file is not. Example: On July 31, 2011 you file for Chapter 7 bankruptcy protection. This is day 182 of a 365 day year. Any money paid up to this point is an asset of the estate and can be taken by the trustee unless it can be exempt with a State or Federal exemption. (Please see the Exemptions blog for a detailed explanation of this subject.)

On April 15, 2012, you will file your taxes and provide the Trustee with a copy of the return. The Trustee will see that you received a refund. Let’s say it was $4,000.00. The Trustee will then ask for the portion that was earned prior to filing. To determine this amount the Trustee or your attorney will divide the $4,000.00 tax refund by 365 days and then multiply this number by the number of days accumulated prior to filing. $4,000.00 / 365 = $10.95 x 182 days = $1,992.90 is an asset and will be taken from you.

Strategically, people who get larger refunds will file in the first quarter of each year to deter the Chapter 7 Trustee from going after the tax refund. The amount of the refund that would be an asset of the estate is so small that it may deter the Trustee from going after it as they would have to hold the case open for an entire year and produce paperwork for very a small amount of money. Generally, Trustees will not go after a tax refund if you file a Chapter 7 bankruptcy case prior to August or September.

Earned Income Credit is not a part of the tax refund that can be taken. It is automatically protected if it has not been received or comingled with other money.

Some people that receive large tax refunds will try and file at the beginning of the new year right after they have just received their large tax refund. When this happens the Chapter 7 Trustee will require proof of where the money went. Proof will be and explanation with receipts. If the money was spent on frivolous things that are not necessary for your household or you can’t provide prove where it went, the Chapter 7 Trustee will object to your case.

If you’re considering filing Chapter 7 bankruptcy, it is important that you get legal advice from an experienced bankruptcy attorney so that you will be aware of how and when you file affects your tax refund.

The Means Test, formally called the Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income, has two main purposes:

1)      To determine one’s eligibility to file Chapter 7  Bankruptcy. And if one is not eligible;

2)      To determine the amount of money paid to your general unsecured debts in a Chapter 13 bankruptcy. (Unsecured debts are debts owed to creditors that don’t have liens or security interest in property, personal or real property. A few examples of unsecured debts are medical bills, credit cards, signature loans, deficiencies on foreclosed homes or repossessed vehicles, pay day loans, etc.)

The means test compares a household’s income and expenses to that of a household of the same size in the same state and also takes into consideration local cost of living.

First, you have to define a household.  A household is everyone who lives with the person or persons who are filing Chapter 7 or 13 Bankruptcy. Generally, this is everyone that is a dependent or spouse of the filing party. In some cases a dependent can be an adult.

Next, you have to determine all income coming in from all sources to the household, and all necessary deductions from this income such as taxes and benefits.

Then, you have to define expenses. The test uses IRS standard expenses for what is considered necessary for the household to keep a roof over their head, vehicles to get members of the household to and from work, food, utilities, etc. Since not all households are exactly the same and fit these standards, the Bankruptcy Court allows additional or increased expenses as long as they are necessary for the health and welfare of the household.

If there is nothing left after the expenses are subtracted from the income, then the person filing is typically eligible for Chapter 7 bankruptcy.

 If there is a certain percentage of money left over after subtracting the expenses from the income, then the person has to file a Chapter 13 and pay this amount back to their creditors.

This is a very basic description of a means test. Every household’s test is different and other factors have to be evaluated in each case.  People often call that tried to do their own means test and tell me they can or can’t file a Chapter 7 and it’s the opposite. So, please, to find out more about a means test and how it applies to your specific situation, please call and schedule a free consultation with our office. With our experience, we can tell you if you qualify for a Chapter 7, or if you need to file a Chapter 13 bankruptcy, approximately what your monthly plan payment would be.   We will complete your means test, even if it’s complicated, for free, so that you can know your options.