Tag Archive: Eligibility


Well, I am terrible about boasting my own achievements – except maybe to my husband – but that is what we joined up with fellow bankruptcy attorney Kaveh Mostafavi for… he seems to be quite adept at making me look simply brilliant.¬† So, since this does deal with an important legal issue in the context of Chapter 13 Bankruptcy – please check out his summary of my recent win for one of our clients here: The OTHER Mostafavi, Marco & Wimmer Bankruptcy Blog

 

Enjoy the read and visit http://www.mmwazlaw.com or http://www.drbankruptcyaz.com to learn more about Kaveh ūüôā

As I previously discussed, the means test plays a major role in determining whether a person is eligible to file for relief under Chapter 7 Рthe liquidation bankruptcy.  However, if you are looking at filing a Chapter 13 reorganization bankruptcy for whatever reason, the means test still plays a role in your Chapter 13 bankruptcy.

The means test form used in a Chapter 13 is slightly different than the one used for a Chapter 7, but the same basic rules about determining your income and taking expenses still applies.  There are some more restrictions as to which expenses you can take, but that is what your attorney needs to worry about. 

Now, each jurisdiction uses the means test slightly differently, so if you are looking for file for bankruptcy outside of Arizona, this blog posting will likely not give you the information you need.  I help people get relief under Chapter 13 bankruptcy in Arizona only, and cannot speak to systems outside of this state.

Basically my goal when doing the means test for your Chapter 13 is to minimize your disposable income.  In Arizona, we determine your plan payment based on your Schedules I and J. Basically we take your current monthly income, minus your current monthly expenses and see what is left over.  However, there is a provision in the bankruptcy code that says, essentially, that the plan cannot be confirmed unless your unsecured creditors get at least as much as your means test shows you have left over at the end of the month.  Depending on your circumstances, that can be an unsurmountable issue.

In short, the means test can still play an important role, even in a Chapter 13 bankruptcy, and you should have a knowledgeable attorney assist you through the process.¬† Chapter 13 bankrutpcy filings are pretty complex, and while it may seem counter-intuitive to pay an attorney to help you ‘go bankrupt’ – we can help you avoid losses and other problems that you may not be aware of otherwise.

In my last post, I discussed how the beginning steps of the means test work – essentially, how your annual household income is determined in order compare it with the median household income for a household of your size in the area you live in.¬† Now, if you are above the median household income, you are not necessarily permanently disqualified from filing for Chapter 7 relief.¬† Today’s post will explore generally the available exceptions to the means test – as in situation where the means test is not looked at.¬† The exceptions¬†are as follows:

  1. If you are a disabled veteran under 38 USC § 3741(1) and your debts were primarily incurred while you were on active duty,  or while you were performing a homeland defense activity;
  2. If you are a reservist or national guard member who was called to duty for at least 90 days after September 11, 2001 and meet certain requirements; and
  3. If more than 50% of your debts were NOT incurred for a primary household or family purpose. 

Now, I don’t see the first two on a regular basis, but a number of my clients do in fact qualify for Chapter 7 relief as “non-consumers”.¬† Basically, the law makes an exception to the means test requirement if more than half of your debt was¬†incurred for a business purpose.¬† Whether that means you used a few lines of credit to float your business, or you invested in real estate – as long as all those debts added together come out to more than your home mortgage, personal credit cards and vehicle debts combined, you may just qualify for Chapter 7 relief even though your income is higher than the means test envisions.

Sometimes it is hard to determine whether you are a non-consumer under this rule, so rather than testing the waters on your own, I recommend you speak to an attorney about whether this is an option for you.  Bad things can happen if you file for bankruptcy without knowing all that is involved.  To learn more about why it is generally not recommended to file for bankruptcy without the assistance of an knowledgable attorney, please click here.

In 2005, Congress amended the Bankruptcy Code to include what is now commonly referred as the means test.  The means test is the analysis that is required to determine whether a potential debtor qualifies for Chapter 7 relief or Chapter 13 relief, and even though it is called a test, it is not as simple as filling out a questionnaire to determine the result.

That said, don’t fill out an online means test – chances are the results are wrong, and it may mislead you into thinking no relief is available¬†for you, or that you are qualified to file, when really you are not.¬† This post will discuss the three step system that the means test uses.

1.¬† The first step is to determine your income for the last 6 months.¬† That is all that is relevant…. it doesn’t matter if you made 200K in 2009, if you didn’t make any money in the last 6 months… It is backwards looking, but only to an extent.¬† The relevant time period is the 6 months prior to filing, not including the month that you are filing in.¬† So, if you were to file in February, we are looking at August 2009 through January 2010. Once your total gross income for the last 6 months has been determined, you multiply it by 2, to give you a yearly average.¬† Then you compare your yearly average with the median household income for a household of your size in the county you live in.¬† This number is determined by the IRS, and the most current listing can be found at http://www.justice.gov/ust/eo/bapcpa/meanstesting.htm.¬†

2. If you are under the median household income you qualify for relief under Chapter 7.  You can still file a Chapter 13, provided you have disposable income at the end of the month to make your plan payment, and, if you do go the Chapter 13 route, you have the option of making your plan only 3 years long (instead of the otherwise mandatory 5 years).  Now, typically this is not a problem, but you also need to review your current income and expenses Рthe expected future numbers so to speak:  If you have a lot of money left over at the end of the month, the US Trustee may argue that you have the ability to repay some of your debts, and your slam dunk 7 gets itself in some trouble.  Your attorney will review this numbers and check the likelihood of a problem for you BEFORE filing, so you know what is ahead.  In my experience, those with an income that is less than the median household income hardly ever run into that problem.  Nevertheless, I always check.

Now, if you are OVER the median household income for a household of your size, not all is lost.  The second step of the means test comes into play, and you may still qualify for Chapter 7.  More on that in my next post.