In a previous post, I briefly explained how bankruptcy courts use means testing to determine if a person is eligible to maintain a Chapter 7 bankruptcy. Let me briefly recap, before I explain what happens if you apply but don’t qualify:

Means testing looks at how much discretionary income you have available to put toward unsecured debt. The Statement of Current Monthly Income and Means Test Calculation will initially show whether you are able to make monthly payments to unsecured creditors – if you can, in an amount above $100 per month, you are ineligible to file a Chapter 7 bankruptcy.

The clerk of the bankruptcy court will send a notice to all the creditors involved, reporting that a presumption of abuse has arisen in the case.

The United States trustee then has until 10 days after the meeting of creditors to file a statement  as to whether a presumption of abuse exists in the case. If the statement is filed, the United States trustee or any creditor can move to dismiss the case. The bankruptcy judge will ultimately decide whether the case should be dismissed.

Why is it called ‘presumption of abuse’?

When a Chapter 7 case is filed by an ineligible person, under bankruptcy terminology that person is said to have “abused” the Chapter 7 laws.

In this situation, a presumption of abuse means that the person seeking Chapter 7 liquidation actually has a current monthly DISPOSABLE income such that he or she can afford to make monthly payments to unsecured creditors in the required amount. Allowing this debtor the protection from future claims by creditors provided by Chapter 7 could be unfair, so a presumption of abuse is said to arise in the case. (I’ll discuss the details of a Chapter 7 “discharge” of debts in an upcoming post.)

What happens next? If a presumption of abuse arises in a case, the case will be dismissed or converted to Chapter 13 – unless the person filing the case can prove the existence of special circumstances, such as a serious medical condition.

Thanks for reading – and remember, I’m happy to answer your questions.

Matt
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Matt Hughson

New York Bankruptcy Lawyer

Ziff Law Firm, LLP
303 William St., Elmira, NY 14901
Tel: (607) 733-8866
Fax: (607) 732-6062
Toll Free: 1-800-943-3529
Email: mhughson@zifflaw.com
Web: http://www.zifflaw.com

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In a previous blog post, “Bankruptcy Basics: What is Chapter 7 Bankruptcy and How Does It Work?” I began to explain the details of filing bankruptcy according to Chapter 7 of the federal Bankruptcy Code. This type of filing, Chapter 7, has compelling advantages to offer debtors, including a resolution to ongoing debt claims if certain criteria are met. “Means testing” is part of the process of establishing eligibility, and I am going to explain what it is.

Do you have the ‘means’ to pay off debt?

Means testing is a method of determining a person’s eligibility to maintain a Chapter 7 case.

A person whose annualized current monthly income from all sources exceeds the median annual income, as reported by the U.S. Census Bureau, for the person’s state and family size, must show that he or she is not able to pay a minimum of $100 per month for 60 months to his or her unsecured creditors from his or her disposable monthly income.

Let me restate that in overly simplistic terms: In order to be eligible to maintain a Chapter 7 case, you must show that you cannot spare $100 a month to pay off debt.

Of course the specifics are very important. As I mentioned, your income level, family circumstances, place of residence are all analyzed and play a part in determining eligibility.

Disposable monthly income is a person’s current monthly income from all sources, minus PERMITTED current monthly expenses.

What happens if you don’t meet the benchmark? The Chapter 7 case of a person whose disposable monthly income is such that he or she is deemed to be able to pay $100 per month or more to unsecured creditors for 60 months will be dismissed or converted to Chapter 13 (unless special circumstances exist, a state of affairs I will explain in other FAQ posts).

How is means testing conducted?

Every person who files a Chapter 7 case must file a document called the Statement of Current Monthly Income and Means Test Calculation.

This document, when completed and filed, is a record of a person’s current monthly income and the current monthly expenses that he or she is allowed to claim. A person may also be questioned about income and expenses at a meeting with creditors.

From these sources, a debtor’s current monthly disposable income is calculated. This figure is then used to determine the amount of the monthly payment that the person can afford to make to his or her unsecured creditors. If the amount of this monthly payment is above a certain figure (usually $100), the person will almost always be disqualified from maintaining a Chapter 7 case.

What happens if means testing finds that you are ineligible to file for Chapter 7? If you file, but do not meet the criteria, you are said to have “abused” the Chapter 7 laws. In my next blog post, I will explain the term presumption of abuse and what it means for those who file for Chapter 7 but do not meet the conditions.

Thanks for reading and let me know if you have any questions,
Matt
___________________________________

Matt Hughson

New York Bankruptcy Lawyer

Ziff Law Firm, LLP
303 William St., Elmira, NY 14901
Tel: (607) 733-8866
Fax: (607) 732-6062
Toll Free: 1-800-943-3529
Email: mhughson@zifflaw.com
Web: http://www.zifflaw.com

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As an experienced bankruptcy attorney in New York and Pennsylvania, I have helped many clients settle insolvency. The rules and conditions for filing bankruptcy are not simple to grasp, especially if you are already suffering stress from financial worries.

The first step on the path to a satisfying resolution is to understand some of the options available. In this NY Bankruptcy Blog, I hope to demystify some of the complicated concepts in this branch of law. This post is the first in a series explaining Chapter 7 bankruptcy. I hope it will help you understand your options.

What is Chapter 7?

The Bankruptcy Code is a federal law that deals with bankruptcy. Chapter 7 is that part (or chapter) of the Bankruptcy Code that deals with liquidation of assets to relieve debt.

A person who files a Chapter 7 case is called a “debtor.” In a Chapter 7 case, the debtor must turn his or her non-exempt property, if any exists, over to a trustee, who then converts the property to cash and pays the debtor’s creditors. In return, the debtor may – if conditions are met – receive a Chapter 7 discharge. The conditions include payment of a filing fee, eligibility for the discharge, and obedience to the orders and rules of the bankruptcy court.

More about how to get a Chapter 7 discharge

The discharge is very important. It is a court order releasing a debtor from all of his or her dischargeable debts and ordering that the creditors not to  attempt to collect them. A debt that is “discharged” is a debt that the debtor is released from and does not have to pay.

You must file, maintain and be eligible for a Chapter 7 bankruptcy to obtain a Chapter 7 discharge.

NOT ALL debts are discharged by a Chapter 7 discharge. By law, some particular types of debts are not dischargeable under Chapter 7 – EVEN IF the debtor receives a Chapter 7 discharge.

Who is permitted to file and  maintain a Chapter 7 case?

Any person who resides in, does business in, or has property in the United States is permitted to file a Chapter 7 bankruptcy case. The exception would be a person who has intentionally dismissed a prior bankruptcy case within the last 180 days.

To be permitted to maintain a Chapter 7 bankruptcy case, a person must qualify for Chapter 7 relief, under a process called “means testing.” I will explain means testing in my next post here on the NY Bankruptcy Blog.

Thanks for reading and let me know if you have any questions,

Matt
__________________________________

Matt Hughson

New York Bankruptcy Lawyer

Ziff Law Firm, LLP
303 William St., Elmira, NY 14901
Tel: (607) 733-8866
Fax: (607) 732-6062
Toll Free: 1-800-943-3529
Email: mhughson@zifflaw.com
Web: http://www.zifflaw.com

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As I discussed in the previous blog, there have been several attempts in Congress to pass a mortgage modification proposal….no fewer than three times over the past year.   Sen. Dick Durbin, D-IL has vowed to try again with the new Congress to pass a bill that would allow bankruptcy judges to modify Chapter 13 debtors’ mortgages on their primary residences.

According to Consumer Bankruptcy Digest, Sen. Durbin recently brought the members of the Senate Appropriations Committe to Chicago, where foreclosure rates have increased by more than 50% in the last year, in an effort to persuade the other members on how this revision to the bankruptcy laws is critical in solving the mortgage mess that the country is currently experiencing.

Both Sen. Durbin and Rep. Brad Miller, D-NC have said that they will make the bankruptcy amendments a priority of the 111th Congress.  They will likely be met with strong resistance from the Mortgage Bankers Association and others in the financial services industry.  Supporting the changes to the bankruptcy code are consumer groups such as the National Association of Consumer Bankruptcy Attorneys and the Commercial Law League of America.   In a recent letter to Speaker Nancy Pelosi, the CLLA stated that Chapter 13 debtors whose mortgages  exceed the value of the property are significantly more likely to fail in their Chapter 13 plan.

I personally support the proposed modifications to the bankruptcy code.  It holds the parties who created the problem responsible….and most importantly it does not cost the taxpayers one cent.  The individuals who borrowed more than they could afford are held responsible, as they have to go through the stigma of a bankruptcy, and will continue to pay on their mortgages, rather than walking away from them, resulting in a foreclosure and further losses to the lender.  The banks who irresponsibly lent money to individuals without much if any documentation that the borrower could repay are held responsible because the (sometimes unconscionable) mortgage would be modified into something that the homeowner may be able to pay.

And because it is so important….I will restate it….IT DOESN’T COST THE TAXPAYERS A CENT!

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I recently read an article in Consumer Bankruptcy News that reported that the ‘New’ bankruptcy law enacted by Congress in 2005 had increased the number of foreclosures.  The increase in foreclosures is almost entirely responsible for the economic mess that the country is in today.

Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.  After carefully reviewing the new law, I concluded that there was nothing resembling ‘consumer protection’ at all in the law, but rather that the Act was drafted for the sole purpose of making it more difficult and expensive for working individuals to file bankruptcy.  In my opinion, the new law appeared not to have been drafted by Congress, but by attorneys for the credit industry.  I expected this new law to be nothing but trouble.  According to this recent study, my fears were well founded.

The study asked whether changes in the bankruptcy laws contributed to the current foreclosure crisis.  U.S. Treasury economist David Bernstein and others believe the answer is YES.  The study, conducted independently of the government, suggests that there are two ways that the new bankruptcy law may have increased foreclosures:

1.  The increased costs and complexities of the new laws may have encouraged some homeowners to walk away from their houses and mortgages, rather than trying to save them in a Chapter 13 bankruptcy. With this, I certainly agree.  In my opinion, the only thing that the new law accomplished is to make it much more difficult and expensive for ordinary Americans to seek bankruptcy relief.

2.  The more stringent payment terms under Chapter 13 may have increased the number of homeowners with large payment obligations that they could not meet. Again I agree.  Increased payments to the credit card companies, less money to pay your mortgage.

So, it looks like the government did a poor job a trying to fix a perceived problem, creating a bigger mess.  I for one will be encouraging the new Administration and Congress to make consumer friendly amendments to the bankruptcy code, such as allowing homeowners to modify their mortgages in a Chapter 13 in order to save their homes.  More on that in blogs to follow.

Matt Hughson, Zifflaw Bankruptcy Attorney

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