Beyond the Means Test

Nearly 8 years after the implementation of BAPCPA, and while not everyone understands it, most people have at least heard of the infamous “Means Test” – the form that calculates how much disposable income a debtor has available for his or her unsecured creditors.  The Means Test looks back at your past six months of gross income, doubles it to compute your gross annual income, and compares it to the median income level for your state and household size.  If below, you’re presumed to have no disposable income, and qualify for Chapter 7 Bankruptcy (if no prior bankruptcy disqualifies you).  If above median, you must complete the second part of the Means Test, which accounts for certain actual expenses, certain debt repayments, and certain IRS living standards to compute disposable monthly income.  Again, if your DMI is low enough or negative, you are in Chapter 7 territory.  Too high, and you’re in Chapter 13 territory.
But is that the end of the income inquiry?  No.  You must still prepare a budget – Schedule I (income) and Schedule J (expenses).  If, after preparing a reasonable budget, it shows that you have a considerable amount of disposable income – you could be forced into Chapter 13 Bankruptcy under 11 U.S.C. § 707(b).  This provision, at (3) allows the court to either dismiss or convert a case if the totality of the circumstances demonstrates that the debtor filed a petition for Chapter 7 relief in bad faith, or that a filing would be abusive of the bankruptcy system.  Most attorneys refer to this section as “the smell test” (if the case seems like it shouldn’t be filed under Chapter 7 – if it smells funny – then it perhaps shouldn’t be).
Why would the Means Test and the budget tell different stories about how much money a debtor has available for unsecured creditors?  I have discovered three major themes that crop up every time there is a discrepancy between the budget and Means Test.
One.  The Means Test does not count all income – namely, Social Security income.  Usually not a big deal, since most people’s social security benefits are a pittance, their sole source of income, and not enough to cover their monthly expenses.  Nevertheless, once I’ve ruled out a Means Test problem, if a debtor is getting SSA income, I do have to look at the big picture to make sure that my client is not going to have a budget problem.
Two.  The IRS living standards are often more generous than what my clients actually spend.  You wouldn’t think so, but I have found it to be true in the majority of my cases.  Sometimes we have the opposite problem – an expense that is not an allowed deduction on the Means Test (which is a topic, perhaps, for a different day).  But again, the big one I keep an eye out for is the debtor who does not have a home mortgage or rent expense.  This may happen anytime they live with mom and dad, or with a boyfriend or girlfriend.  The Means Test assumes a home payment.  But if that expense doesn’t exist on the budget, that’s a significant expense that is missing.
Three.  The Means Test looks to the past to predict the future.  The budget just looks to the future.  So, a single debtor with no kids who has been on unemployment for 4 out of the past 6 months may easily pass the Means Test, but if his new job has him making $60k a year, it is going to be difficult, if not impossible, to create a reasonable budget that shows he has no disposable income left over.
There is a fourth unusual circumstance.  11 U.S.C. § 707(b) applies only to debtors whose debts are primarily consumer debts.  A debtor whose debts primarily arose from the operation of a business – they are not subject to the Means Test.
But what about their budget?  11 U.S.C. § 707(a) – which does apply to business debtors – allows the court to dismiss for “cause”.  Three examples are given in this section, but they are not held out as an exhaustive list.  Most courts have held that since the ‘smell test’ is laid out in 707(b), if Congress had meant for it to apply to non-consumer debtors, then it would have been explicit in 707(a).  But not all courts agree.
In re Rahim, 442 B.R. 578 (Bankr. E.D. Mich. 2010) – held that a debtor who continued to live a lavish lifestyle with no effort to curtail his expenses – was not entitled to Chapter 7 relief, despite his debts being primarily non-consumer.  This ruling was upheld by the District Court on appeal (federal district courts have appellate jurisdiction over federal bankruptcy courts).
While this decision is not binding on courts in our jurisdiction, it is worth noting that the case exists – and that it may be used as persuasive authority in the future on a case in our area.

BAPCPA Anniversary Reminder #2

This is just a reminder to those of you who filed bankruptcy before BAPCPA went into effect and intend to file again when their 8 years is up, please call us to schedule an appointment today, instead of waiting until October.
As you may remember from my previous post, a lot of people felt compelled to file bankruptcy during the 2005 hysteria, erroneously believing that they would be unable to file for bankruptcy once BAPCPA went into effect.  In many cases, the October 17 deadline induced people to file prematurely – before it would have been in their best interest to file.
Without the imminent nature of another round of changes to the bankruptcy law, people are able to approach bankruptcy more level-headed, better educated, and able to make more informed decisions.  Nevertheless, there will be some who are waiting for October 17, 2013, when they will once again be eligible for another Chapter 7 discharge, and intend to do so quickly because of an imminent threat of wage garnishment or other invasive debt collection actions.
If you believe that you may be facing such an imminent threat, don’t wait until the last minute to meet with an attorney.  The bankruptcy laws have indeed changed, and while it is certainly possible to file, the requirements that one must fulfill before they can be eligible are substantial.  In other words, bankruptcy is more complex nowadays than it was 8 years ago, and it takes a little longer to get a case ready to file than it did 8 years ago.  By speaking to us now, you can use the time between now and your eligibility date to prepare yourself for your next bankruptcy case, and hopefully be able to approach bankruptcy this time around in such a way that you won’t have to undergo something like this again in the future.
At Holbus Law Office, we know we’ve done our job if you only need our services once.

Locating tax liens, and why they’re important.

One of the issues that has frustrated clients in the past is locating the existence of tax liens.  The IRS and the state will send notices of them, but most people disregard or trash these notices without fully comprehending their meaning.
In Chapter 13, tax liens are entitled to treatment as secured creditors.  They don’t get Till interest (prime rate, currently at 3.25%, + 1-3%) , but they do get the underpayment rate (currently at 3%).
Why is this important?  Taxes are generally presumed to be either priority or non-priority.  Priority taxes are usually taxes from within the past three years (with multiple caveats and loopholes that I won’t bore you with today), must be paid in full, but get 0% interest in this district.  Non-priority taxes (typically older than 3 years) do not have to be paid in full, and may be dischargeable.
But if a tax lien is filed against you, not only does the debt have to be repaid, but it also has to be paid with interest.  If the tax debt is only $1k and you enjoy today’s interest rate of 3% – the effect is pretty minimal – an extra $79 over 5 years.  But what if you have a larger tax liability?  Let’s say…  $25k.  And let’s assume a higher interest rate.  It was 8% as recently as the fourth quarter of 2007, and 11% back in 1991.  $25k at 8% is an extra $5,414.60 over the life of the plan.  With the trustee’s fee, that bumps up a plan payment an extra $100/mo.
We like to know about these things ahead of time, so that you make an informed decision before you file your case, and so we have a smooth process to confirmation.
So with that in mind, here’s how to find out if you have a tax lien…

  1. You should search if you owe taxes to the IRS, or taxes or benefit overpayment owed to the state.
  2. Go to the Register of Deeds’ office in any and all counties in which you own real estate, and ask to check for a tax lien.
  3. Check for tax warrants filed against you with the Clerk of Courts.  For Wisconsin, go to http://wcca.wicourts.gov/index.xsl
  4. Check your state’s registry of UCC filings.  For Wisconsin, go to https://www.wdfi.org/ucc/search/
  5. You may also consider a comprehensive records search through a provider such as Lexis.

Lottery Winnings and Inheritances

From time to time, I like to point out absurdities in the bankruptcy statutes that demonstrate how obtuse Congress was when crafting BAPCPA.
Take 11 U.S.C.§ 541, for instance.  It outlines what does and does not comprise a bankruptcy estate.  When a bankruptcy case is filed, everything you own and everything you have an interest in becomes property of a “bankruptcy estate”.  It doesn’t mean you lose your property, but this provision is actually very important in the creation of the automatic stay protections.  In Chapter 7, the trustee will evaluate your property exemptions, determine what – if anything – is not exempt and then liquidate those assets for the benefit of unsecured creditors, and relinquish the remaining bankruptcy estate assets back to you.  You’ll probably never see any of this take place – it’s more of a legal formality on paper.  In Chapter 13, a similar procedure happens, but typically, all is released except for future wages earmarked to fund the repayment plan.
So now you know what a bankruptcy estate is.  What’s funny about sec. 541 is that it includes property that you inherit up to 180 days (about 6 months) after your bankruptcy case is filed.  So, if you file bankruptcy on January 1, and on April 15, your mom dies and leaves you a pot of gold – that pot of gold is most likely going to your unsecured creditors.
Some people think it’s unfair.  First of all, the debtor wasn’t entitled to the inheritance at the time his or her bankruptcy case was filed.  9 times out of 10, the debtor could not have reasonably known that something like this was going to happen.  Second, it’s sort of a shitty thing to do to someone who just lost a relative.  “Hey, sorry your mom died.  And to add insult to injury, I’m taking this money that she willed to you.”
The law on its own is not terribly absurd.  It was designed to prevent people who knew that they were going to be getting a sizable inheritance shortly from a sick relative from screwing over their creditors simply by filing bankruptcy before the relative died.
What makes this law absurd is that sec. 541 is completely silent to lottery or gambling winnings.  Theoretically, you could file bankruptcy on January 1, win $100 million playing Powerball on January 2, and keep the entire winnings.  But if you inherit, say $50k from your mom on January 3 – most if not all that money is going to your creditors.
And just to clarify, the 180 day rule on inheritances is based on entitlement, not acquisition.  What that means is that if someone dies in that 180 days and you’re entitled to inherit something – regardless of when those funds are ever ultimately transmitted to you – that money is property of the estate.  I have a small handful of bankruptcy cases held open right now because we are waiting for a probate case to wrap up.  Some probate cases drag on for years.  (These issues typically do not delay entry of the discharge order, it just leaves the case open for administrative processing.)
Now, I may be misleading you by saying that winning $100 million in the lottery the day after filing means your winnings are safe.  There is certainly a theory that your case could be dismissed or converted to Chapter 13 under 11 U.S.C.§ 707(b).  At this time, I am unaware of any such case (I’ve searched for cases citing 707(b) and either ‘gambling’ or ‘lottery’, with no results).  That’s not surprising.  The instances of lottery winnings are – by nature – statistically rare.  Combining that with a recent bankruptcy filing is going to yield even fewer instances.  But some day, I’m certain this issue will come up, and it will be interesting to see how it unfolds.

United States v Windsor

Last week, the U.S. Supreme Court issued two decisions on the question of gay marriage: U.S. v. Windsor (which ruled that the Defense of Marriage Act (DOMA) was unconstitutional), and Hollingsworth v. Perry (which was dismissed on lack of standing, leaving same sex marriage legal in California).
For our purposes here in Wisconsin, Perry has no immediate impact.  Windsor, on the other hand, might.  Two questions immediately pop into mind for a bankruptcy practitioner (and, by extension, individuals contemplating filing for bankruptcy).

  1. Can a same-sex couple married lawfully in another state (currently: California, Connecticut, Washington, D.C., Delaware, Iowa, Massachusetts, Maryland, Maine, Minnesota, New Hampshire, New York, Rhode Island, Vermont, and Washington) move to a state where same sex marriage is not recognized (such as Wisconsin) and file a joint petition to file bankruptcy?
  2. If the answer to the first question is “yes”, then the next question is whether a couple filing such a petition may be allowed to double the state’s exemptions as any other couple could?

I am not going to address the second question in this blog post because it presupposes  the answer to the first question, and truthfully, I don’t feel sufficiently qualified to answer that question.  I mention it to acknowledge that the question needs to be considered, and to bring focus on one of the few areas where state law intersects with federal bankruptcy law.
So, let’s go back to the first question.  Can a married same-sex couple file a joint petition for bankruptcy relief in Wisconsin?  I have been debating this issue with colleagues for the past week, and we have been unable to reach an agreement.  Some of us think the answer is ‘yes’.  Some of us think the answer is ‘no’.  But almost all of us agree that both sides of the argument have merit.  Ultimately, it looks like we will need to wait for a test case to be filed, and get a judicial decision on the question.
For the record, I think the answer is ‘yes’, and I would be willing to file such a test case if another attorney doesn’t beat me to the punch.
The the United States operates under a concept called federalism.  We have two levels of governance – state government and state laws, and federal government and federal laws.  DOMA is one of many laws that has illustrated the inherent conflict that exists in a structure such as this.  Marriage has – traditionally – always been under the purview of the states, but DOMA (as Justice Kennedy explained in last week’s decision) had the effect of making a federal issue out of marriage, and created two unequal types of marriage in states that chose to protect and equalize both opposite-sex and same-sex marriages.
Whenever federalism becomes an issue, you’ll hear a number of Constitutional concepts floating around.  Some of them run at odds with each other.  This includes the Supremacy Clause (which basically asserts that when state law conflicts with federal law, then federal law trumps state law), Full Faith and Credit (which requires the federal government and the 50 state governments to honor “public acts, records, and judicial proceedings of every other state”, State Sovereignty (via the 10th Amendment, stating that those powers not expressly reserved by the federal government are retained by the states), the notion that having 50 states allows “test tube” democracy – where ideas can be experimented upon and perfected before being exported to the entire nation, and finally, the due process and equal protection amendments (5 & 14).
DOMA was overturned based principally on the notion of state sovereignty.  Marriage was outside the scope of federal law, and therefore, federal law could not be used to curtail decisions by states to permit same sex marriage.
Nevertheless, the unconstitutionality of DOMA does not make same-sex marriage legal in the entire United States.  It just raises the recognition of those marriages in states that permit it to be on par and equal with their straight counterparts.
One more thing to note before we get to the analysis and question at hand.  DOMA had two key components.  “Section 3” – ruled unconstitutional last week – defined marriage for the purpose of construing federal statutes as a union between a man and a woman.  “Section 2” – which was not at issue last week and therefore remains in full force and effect – removed the requirement that states honor same sex marriages that were recognized in another state (an apparent direct violation of the Full Faith & Credit clause).
Bankruptcy is a matter of federal law.  The petition for relief is filed in federal court.  The judge is a federal judge.  The trustee is appointed by the U.S. Department of Justice.  Bankruptcy is created by federal statute.  The state laws do come in to play in terms of administration of the bankruptcy estate, the state government plays no role in the administration itself.
In my opinion, this means that a same sex couple lawfully married in New York can then move to Wisconsin and file a joint petition for bankruptcy relief.  The State of Wisconsin is still free to deny privileges and benefits to that couple emanating from state law under section 2 of DOMA, but since the state government plays no role in a bankruptcy case, they would not be able to step in and interfere with the case.
Take a similar analogy.  Let’s say that the same sex widow of a war veteran (married in New York and moved to Wisconsin) applies for survivor benefits from the Department of Veterans Affairs.  The benefit is strictly a federal benefit, and the state plays no role (I’m not a VA attorney, so I’m not sure if this is accurate, but for the sake of argument, we’re going to pretend that it is).  In light of Windsor, it wouldn’t make much sense that the surviving spouse would be denied this benefit based solely on the fact that the application for the benefit originated from Wisconsin.  In fact, if it did, I would characterize such an act as absurd, repugnant, and arbitrary.
However, one of my colleagues makes a good point.  The bankruptcy code, at 11 U.S.C. § 302, allows joint petitions between a debtor and the debtor’s spouse, and state law traditionally determines who qualifies as a spouse.  This argument doesn’t convince me, but I acknowledge that there is a valid argument on the other side saying no.
But at the end of the day, I believe that Wisconsin can only deny state benefits to a lawfully married same sex couple.  Strictly federal benefits should now be open to all same sex couples, even if they no longer reside in the state in which they were married.  It still does leave open several questions – not the least of which are state property exemptions.  But we will save that debate for another time.  Wisconsin residents are entitled to choose between federal and state exemptions, so it is possible and likely to get an answer on the first question before we tackle the second.
As developments occur, I will post updates.
It’s also worth noting that the Supreme Court granted certiorari in Executive Benefits Insurance Agency v. Arkison, which is a follow-up to Stern v. Marshall, and presents the questions of whether bankruptcy judges (who are Article I judges) can exercise Article III jurisdiction if it has consent of the litigants, if implied consent is adequate, and whether bankruptcy judges can submit proposed findings of facts and conclusions of law to the District Court (Article III judges) for de novo review.