And now, for something completely different…

It’s a bird… It’s a plane… No! It’s BAPCPA Man! Bankruptcy doesn’t have to be gloomy. Take a look at the lighter side with Steven Horowitz and Gideon Kendall’s creation, BAPCPA Man here: Last Saturday, they posted this excellent cartoon illustrating the foibles of the Means Test.
Before you panic, do be aware that case law across the country is beginning to change. The bankruptcy code is being interpreted to have the Means Test be the starting point for calculating the ability to repay, but it is not the Alpha/Omega. Other factors can be considered. We have a few cases on point here in the Eastern District of Wisconsin – one of them being my case, In re: Hilton, 08-25440, which is the crown jewel of my career, so far.

Do I have to disclose all of my income?

Yes. Your income is required not only to determine which chapter of bankruptcy you qualify under, but also to determine how much of your debt you must repay, if any. Most often, clients understand that ordinary employment is income that they must report. Some of the other sources have a tendency to slip their minds. Remember that you must disclose all of your income to your attorney from the six months prior to when you file your bankruptcy. This may include:
  • Business Income
  • Rental Income
  • Child Support, Alimony, and Maintenance
  • Gambling Winnings
  • Regular Retirement Disbursements
  • Retirement Withdrawals
  • Life Insurance Policy Withdrawals
  • Inheritences
  • Social Security / SSDI Benefits
  • Short-Term or Long-Term Disability Payments
  • Unemployment
  • Workman’s Compensation
  • Public Benefits (food stamps, rental or utility assistance, etc.)
  • Per Capitas
  • Annuities
  • Contributions from others in the household

Not all of these sources of income are reported on the Means Test. Nevertheless, all sources must be disclosed so that the Trustee can form an overall picture of your financial situation. Failure to disclose your income could result in a dismissal of your bankruptcy case.

Do I make too much money to file for bankruptcy?

One of the major reforms that the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) introduced was the Means Test. Debtors filing under Chapter 7 bankruptcy must be below their state’s median income level for their household size. If the debtor is above the median income level, they must complete the rest of the form, which offers a variety of deductions – some based on IRS standards, and others based on the debtor’s actual (and reasonable) expenses. The remainder of the form is the debtor’s last chance to beat the presumption of abuse. If the debtor cannot overcome the presumption, they should file under Chapter 13.
In Chapter 13, the Means Test operates in much the same way, but the main goal is to determine how much you are required to pay back to your unsecured creditors during the term of your repayment plan. Being below or above median will trigger certain requirements, some of which vary by jurisdiction.
As BAPCPA is still relatively new to the legal community, so is the Means Test. Judges, Trustees, creditors, and debtors are still debating how to interpret and how to calculate many lines on the form. The law is constantly changing with each judicial ruling, and the law varies from district to district. One of the major flaws of the means test, particularly in Chapter 13, is that it extrapolates your income from the past six months out for the next 36-60 months. The Means Test is a snapshot of your current financial situation, and operates on the basic presumption that your financial situation will not change, when in fact, change is often what triggers people into filing bankruptcy in the first place. The law has developed in a number of ways to account for some of these changes, and your attorney can best guide you in your options to address them.

Do I have to disclose all of my assets?

Yes, all of your assets must be disclosed to the bankruptcy court. The concept here is simple: if you are sitting on a proverbial gold mine, there is no reason you shouldn’t sell that gold mine to pay off your debts, rather than receive the benefit of a bankruptcy discharge.
In your bankruptcy case, you will be entitled to use a set of property exemptions. These are allowances of the amount of property that you are entitled to keep. In the state of Wisconsin, you are allowed to use either the Wisconsin state set of exemptions or the federal set of exemptions. Federal exemptions are fairly generous and can protect all of the assets in the vast majority of cases. State exemptions are used less frequently, but have a benefit for single debtors who have more than $20k equity in their home.
If you have property with a value that exceeds the allowed exemptions, then a Chapter 7 Trustee may seize that asset, and sell it for the benefit of your unsecured creditors (this is called an Asset Case). Alternatively, you can file Chapter 13 to keep your property, but you buy out the Chapter 13 trustee’s interest in un-exempt assets over the course of a 3 or 5 year plan. This money is earmarked for your unsecured creditors, and they are thus made as whole as they would have been if your property had been liquidated under Chapter 7.
Some people, believing that their property is going to be taken, try to hide assets from their attorney and the bankruptcy court. They erroneously think that if they don’t disclose what they have that it can be protected. This is a huge mistake. Your attorney cannot apply exemptions and protect property that he doesn’t know about. Trustees and creditors have some clever ways of finding out if you’ve hidden anything. You might get away with it, but if you get caught, I can just about guarantee the consequences would be far worse than if you had disclosed your property to begin with and let your attorney find the best way to deal with it.
Placing a value on your property can be confusing. For simple cash and baking assets, the value is quite obvious. Vehicles have standard values that can be determined via Kelly Blue Book or NADA. For real estate, we look at a combination of municipal assessments, appraisals, comparable markets, and overall housing market conditions. For household goods, we are putting ourselves in the trustee’s shoes (when he liquidates) and the question becomes: what would a disinterested third party would pay?
Finally, we get to the question of what constitutes an asset. An asset is anything of value that you have a legal ownership interest in. Many people hear the words “property” or “asset” and think real estate. Real estate is certainly property, but it is not the only thing that counts. The following list will give you an idea of how diverse property can be, but it is certainly not an exhaustive list.

  • Real Estate (residence, business property, rental property, hunting land, timeshares, etc.)
  • Vehicles (automobiles, boats, motorcycles, ATVs, snowmobiles, campers, aircraft, etc.)
  • Household Goods (Furniture, Appliances, Electronics, Clothing, Books, CDs, DVDs, hobby equipment, firearms, hunting equipment, sporting equipment, tools, photos, art, jewelry, office supplies, etc., etc., etc.)
  • Cash
  • Bank Accounts
  • Life Insurance Policies
  • Retirement Accounts
  • Security Deposits
  • Stocks and Bonds
  • Tax Refunds
  • Potential Claims / Lawsuits
  • Potential Inheritances
  • Pets / Animals / Crops
  • Trusts
  • Business Assets, if you own or have a partial interest in the business
  • Patents, Licenses, Copyrights

Everything that you own constitutes an asset that is property of the bankruptcy estate, down to the last paper clip in your desk drawer. Of course, as a practical matter, we don’t list every single pen, pencil, and thumbtack down to that level of nauseating detail. Most attorneys will list something to the effect of “Miscellaneous Knicknacks” to cover the aggregate value of all of your property that is of negligible individual value. But do not try to decide for yourself that something is too insignificant to disclose.
As you may have noticed from the list above, property can be tangible (e.g. vehicle) or intangible (e.g. copyright). It can be cash or something with a same-as-cash value (e.g. retirement account), or it can be something of varying or subjective value (e.g. real estate). Perhaps you only have a partial interest in the property (e.g. you and a friend each own one-half of an interest in some hunting land). Perhaps you have a future interest, which means you cannot access the asset or you do not yet have possession, although you are legally entitled to it (e.g. tax refund, inheritance).
Think of everything, and tell your attorney about it immediately. Your attorney cannot protect what he doesn’t know exists. Surprises are for birthday parties. It is considerably easier for your attorney to fix problems before your case is filed than it is after.

Will anyone take my house, car, or other personal property?

Generally, no. In bankruptcy, there are only two reasons that you would lose the property that you own, and both problems can be resolved in Chapter 13 so that you don’t lose anything.
The first problem is if the property that you own exceeds the allowable exemptions in your district. In each bankruptcy case, you are required to list all of your property and its value, meaning real estate, vehicles, cash, bank accounts, insurance policies with cash value, retirement accounts, expected tax refunds, household goods, etc., etc., etc. Your attorney will then claim the value of your property as exempt using the applicable exemption set allowed in your jurisdiction. In Wisconsin, we have the choice of using the federal set of exemptions or the Wisconsin exemptions (provided you meet certain residency requirements). I find that in almost all cases, the federal exemptions offer the best coverage, and in the vast majority of cases, we can easily protect all of your property. In some cases, however, the value of the debtor’s property exceeds the exemption limits. In Chapter 7, the Trustee can take any un-exempt property and sell it, using the proceeds to compensate your unsecured creditors. You could attempt to negotiate with the Chapter 7 Trustee to buy out his interest in your property, but given that you’re filing for bankruptcy, and the short lifespan of Chapter 7, it is unlikely that you will be able to afford this option. Alternatively, you can file a Chapter 13, buying-out the Trustee’s interest in your property and spreading that obligation out over the term of your repayment plan.
The second problem is if your property is subject to a lien (e.g. a mortgage or auto loan) and you are in default of the terms of repayment. Default on a secured debt is termed “arrearage.” Even if your intent is to continue paying the secured debt and retaining the collateral, the creditor has inadequate protection for the arrearage, and could repossess the property. Provisions in Chapter 13 of the bankruptcy code allow for the curing of arrears as part of the repayment plan. If you are going to file Chapter 13 to stop foreclosure or repossession, be certain that your bankruptcy case is filed before your property is taken!