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Tuesday, July 24, 2012

When is The Appropriate Time to File Chapter 7 Bankruptcy? Part 2 Income Issues

       Although income considerations were always a factor in determining when and if to file a Chapter 7 bankruptcy the creation of the Mean Test by the amendments to the Bankruptcy Code in 2005 added more to consider in making this decision. In simple terms the Chapter 7 means test uses the IRS median income based on household size and applicable state to first determine if a debtor has to satisfy the means test in order to qualify for Chapter 7. For example for a three person family in Connecticut the current median income is $82,797.00. If the debtors' combined income for the six-month period immediately preceding a bankruptcy filing calculated on an annual basis equals less than the $82,797.00 there is no “presumption of abuse" and no need to complete the means test. If the opposite is true than the means test needs to be completed which makes the filing more difficult due to the arbitrary means test expense calculations and the strong likelihood of a United States trustee audit of the file to determine eligibility for discharge. This means in cases where debtors' incomes are close to the median income and fluctuate from month to month the timing of the filing can determine whether the means test comes into play or not.  Clearly all other factors aside the appropriate time to file is when the six month income brings the debtor below the median income to avoid the means test. This by itself will not determine whether debtors may file Chapter 7.  There are still the income and expenses schedules that need to be completed for which the income and monthly expenses for the next 12 months are projected. These schedules are based on actual figures and allow debtors to take into account recurring expenses like student loans which the means test does not.  I find that in most cases if a debtor has reached their financial bottom and reached out to me to help them that if their income falls below the means test median income they usually qualify for a Chapter 7 discharge. 
     Another factor to look at when reviewing income and the means test is the household size of the debtors. The definition of household size is not necessarily just the nuclear family. If an elderly relative or sibling with little or no income contribution to the debtors' household income lives with the debtors' family for the six month period prior to filing they can be included in household size. In some cases this increase in household size can make the difference whether the debtors have to pass the means test or not.  Finally, if it turns out that the debtors have to pass the means test it does not mean they automatically will not qualify for a Chapter 7 bankruptcy. Each case is unique and in cases where the debtors have large secured debts due to mortgages and car loans and they intend to keep these assets there is a stronger likelihood that they will pass the means test. This may also be the case where a debtor has high recurring medical costs due to a medical condition which can be viewed as a special circumstance under the means test. I had a case like this and after providing the necessary doctor reports and proof of medical expenses to the US Trustee my client obtained her discharge. These audits are not easy, but if debtors can provide the requisite documents to the US trustee to satisfy their audit they can obtain a discharge.

Friday, July 13, 2012

No Shame If You Need to File Bankruptcy to Obtain a Fresh Start

The emotional reaction that my clients have toward filing bankruptcy is always an important consideration that I take into account during my initial consultations with them. There are very few clients that I have met with that do not possess some degree of shame or sadness due to the fact they have reached their financial bottom and need to file bankruptcy. Certainly back in 2005 when creditors were able to have the bankruptcy code rewritten in their favor there was a concentrated publicity campaign to depict all bankruptcy filers as gaming the system. The language added to the code included terms like "presumption of abuse" and "abusive filing." This initially created the mistaken belief that bankruptcy was no longer an option for most people suffering financial difficulties. A result that the creditors behind the changes to the Code were no doubt quite pleased with. Over time this misplaced belief has dissipated, however, I still see that my clients are affected by the stigma that creditors wanted to attach to bankruptcy filers. I am not advocating that anyone take a cavalier and irresponsible attitude toward their debt obligations by filing bankruptcy. My point is that if someone without the income and assets needed to pay off their debts has reached their financial bottom there is no shame obtaining a fresh start by filing bankruptcy. Understandably it may not be the option all people want to take and it is not a decision to be made lightly without proper advice and counsel. During my consultations I not only have to address the legal issues that may be involved, but help counsel clients with the emotional baggage that has built up over time and cannot be overlooked at these meetings. They made need to vent or cry and that is okay since it is all part of working through their emotions. My holistic view of a fresh start is that it is not only a financial one, but an emotional one that allows clients to move forward positively to rebuild their lives.

Tuesday, July 10, 2012

When is the Appropriate Time to File Chapter 7 Bankruptcy? Part One:Preferential Transfers

    After the initial determination that a Chapter 7 bankruptcy is the best option for a client one of the next issues that needs to addressed is when should they file? There are a number of factors that determine the appropriate time to file some of which can have significant consequences if not handled properly. The discussion below focuses on the effect of preferential transfers and the appropriate time to file bankruptcy. First, assuming there are no other reasons to hold off filing the existence of a judgment with wage and bank executions makes filing as soon as possible necessary to avoid and decrease any future losses. This need to file right away may be countered, however, with the existence of a preferential transfer which may mean the client needs to delay their filing till the relevant preference period expires. If a loan is repaid to an insider relative within one year of a bankruptcy filing this automatically is considered an avoidable transfer by the bankruptcy code. What this means is that the bankruptcy trustee can go after poor mom and dad for the money that was repaid to them and disburse that to the debtor's creditors. Certainly not a result any client wants his parents or siblings to have to go through as a consequence of their bankruptcy filing. The remedy of course is to wait till the year has expired before filing bankruptcy. Also it is important that the payment back to mom and dad was a valid repayment of a loan and not a fraudulent conveyance to hide assets from creditors. I will leave the discussion of fraudulent conveyances for another post, but suffice it to say that the look back period is at least 4 years for these types of transfers and even then depending on what, when and how much was transferred bankruptcy may never be an option.   
During the pre-filing ninety day preference period any payment in excess of $600 to any creditor of an antecedent debt can be avoided by the trustee. An antecedent debt, for example, is an old credit card bill or medical bill as opposed to a monthly mortgage, utility or car payment. Now in many cases unlike a transfer to an insider relative a client may not care if a trustee were to go after Bank of America to get back a $1,000 preferential credit card payment and still file within the ninety days. This may and usually is not the case when the payment is to the family dentist for some recent dental work who the client wishes to remain on good terms with. Again the remedy is very simple just wait for the 90 days to expire to file bankruptcy and Doctor Goodteeth will not hear from the trustee and will continue to treat the family. This post only touches upon the timing of a bankruptcy filing in relation to possible preferential transfers and there are several other factors including asset issues, foreclosure and/or loan modification status and income fluctuations among others that need to be considered before filing bankruptcy. I will address these issues in future posts so stay tuned for Part Two.