New Median Income Levels

New median income levels (which are basically the starting – yet rebuttable – presumption of whether someone qualifies for Chapter 7 bankruptcy or needs to file under Chapter 13) go into effect April 1, 2016.  For Wisconsin residents, the new levels are as follows:
Household of 1: $44,817 (up $53)
Household of 2: $59,668 (up $71)
Household of 3: $69,492 (up $82)
Household of 4: $85,961 (up $102)
Each Additional Person: + $8,400 (up $300)

Bankruptcy… it’s not just for poor people.

There is a great misconception out there that to file bankruptcy is synonymous with admitting that one is poor, and this is just not true.  Even billionaires (like Donald Trump) and multi-national corporations (practically every airline I’ve ever known to exist) file for bankruptcy.
Bankruptcy has less to do with debt or income, and more to do with the ratio between those two.  Someone making $30,000 per year and only $6k in debt has much less need to file bankruptcy than someone making $60,000 per year with $100k in debt.
In fact, people who are truly “poor” are often the people who benefit from bankruptcy the least.  If they are below the poverty guideline or receiving public assistance, their wages are generally exempt from garnishment in the state of Wisconsin.  That’s not to say that poor people can’t file bankruptcy.  They may wish to do so just to end creditor harassment.  But they face fewer invasive debt collection actions as opposed to their wealthier counterparts.
So no, you do not have to be poor to file for bankruptcy.  No, filing bankruptcy doesn’t mean you are poor.  And no, bankruptcy isn’t just for poor people.
Now, the wealthier you are, the less likely it is that you will qualify for Chapter 7 bankruptcy.  But again, the qualification for Chapter 7 (if your income is above the state median income level) has more to do with your debt-to-income ratio than anything else.  I have routinely represented families with six figure household incomes.  And while many of them had to file Chapter 13, more than a few have qualified for Chapter 7 – depending on the overall circumstances.
Remember – bankruptcy doesn’t mean that you’re broke.  It means that you cannot afford to pay all of your bills as they come due, and require some form of relief.  Whether that relief is a discharge, a reduction in interest rates, or something else depends on the particular facts of your case.

Are discharged debts taxable income?

Does filing for bankruptcy have an effect on your tax return?
Generally, no.
26 U.S.C. § 108(a)(1)(A) excludes from your income any debt that was discharged in a Title 11 (not Chapter 11) bankruptcy case.
There are other exclusions enumerated at 26 U.S.C. § 108, but I leave those exclusions to be addressed by tax law professionals.  Suffice to say, if a debt was cancelled for reasons other than a bankruptcy discharge and one of those other exclusions does not apply to the, you could be taxed on that balance for what is known as “cancellation of debt” income.
26 U.S.C. § 108 is a federal statute, and therefore only applies to income for purposes of your federal tax return.  What the federal government excludes as income may be included in other states.  You will want to talk to an experienced tax professional to determine any tax obligations you may have due to debts discharged in bankruptcy.I am given to understand that the State of Wisconsin generally follows the federal standards for including and excluding income, which means that Wisconsin taxpayers should also experience no adverse tax impacts from filing for bankruptcy.  However, I have heard reports in a couple of isolated cases where the Wisconsin Department of Revenue included income that was discharged in bankruptcy.  These cases were dealt with by tax attorneys, and I have heard no news on the results in those cases.  It isn’t clear yet whether the taxpayer simply misunderstood the tax assessment, whether there were special circumstances in these cases, or if the Wisconsin Department of Revenue was “testing the waters” to expand their powers.  If and when I hear news on these cases, I will – of course – share them.Suffice to say, most bankruptcy debtors experience no issues with their state taxes, and until we learn otherwise, these instances should be considered flukes.

Is Bankruptcy the Best Option for Me?

Can I file bankruptcy?

Should I file bankruptcy?
Is bankruptcy right for me?

My first job out of law school was for a highly profit-driven law firm that believed that everyone could benefit from bankruptcy in some way, and that there was no excuse for an attorney to not get a prospective client to retain our services.
I won’t say who that law firm is, but you can identify firms like these pretty easily.  Many of them will have a short survey posted on their website that asks you a few questions to determine if you should file for bankruptcy.  The survey is coded and rigged in such a way that no matter how you answer the survey (or if you answer ‘yes’ to even one question, and the questions are designed that 99% of people would), then the result would be a profound warning that you needed to file for bankruptcy right away.
That law firm I used to work for – and other firms like it – are absolutely wrong.  Bankruptcy is not for everyone.  Admittedly, it is true that there are few people in the world who – if they filed for bankruptcy – would not get any benefit from it.  But those people are out there.  Sometimes they land in my office.  If someone would not benefit from bankruptcy – I will tell them, even though it costs me business.  I, as all attorneys do, have a duty and ethical obligation to look out for my clients’ (and prospective clients’) best interests.
So… rather than post a gimmicky survey, I’m going to walk you through some of the factors you should consider if you’re thinking about bankruptcy.  It won’t be as easy and fast to go through as a six question survey, but I feel that you will have a much clearer idea of what you need to do after reading this article.
Of course, since I can’t know the specifics of your financial circumstances, this article paints with very broad brush strokes.  There is no substitute for getting a consultation from an experienced bankruptcy attorney who can analyze your particular situation.  Most attorneys – including myself – offer free initial consultations.  There is no risk or commitment.  Just an opportunity for you to arm yourself with information and options.
Fundamentally, what is bankruptcy?
Declaring bankruptcy, in its most fundamental sense, is nothing more than asserting that you cannot afford to pay all of your debt obligations as they become contractually due.
Put another way, if your income is X, your ordinary living expenses are Y, and minimum payments on your debts is Z, then X – Y < Z.  The shortfall could just be a few dollars a month, or a few thousand.  Either way, the equation is unbalanced.  Ideally, you want it to look like either X – Y = Z or X – Y > Z.
But I’m not poor…
Bankruptcy is not just for poor people living off of unemployment benefits or food stamps.  In fact, many people on public benefits would benefit the least from bankruptcy protection – essentially because they have little or nothing to lose.  In Wisconsin, those receiving public assistance are protected from having what little wages they have from being garnished.
People have a tendency to look at key items of their financial circumstances in isolation.  “I make $100,000 per year, therefore, bankruptcy isn’t for me.”  “I only have $10,000 in debt, therefore, bankruptcy isn’t for me.”  Well, if you’re making $100k a year and only have $10k in debt, I might be inclined to agree.  But if you’re making $100k a year and trying to pay back $500k in taxes – then you might need some help.  And a single mother raising two kids on $30k a year might get a lot of benefit from bankruptcy even if her debt is only $10k.
It’s not just about your debt or your income, but your debt-to-income ratio.
But I have excellent credit…
Have you pulled your credit report and score?  Recently?  Most people who tell me this haven’t.  They think their credit is excellent because they have never missed a payment.  But your credit score is much more than just a record of your payment history.  Your credit score is affected by numerous factors, including your income, your assets, debt-to-income ratio, minimum monthly payments, number of active accounts, types of credit accounts, your indebtedness relative to your available credit, residential stability, occupational stability, length of credit history, and credit inquiries.
All we’re saying is – if you’re reading this article and you haven’t pulled your credit recently, it might not be as high as you think.
That being said, impact on your credit score is a valid concern.  Bankruptcy does negatively impact your credit – there’s no denying that.  If there is a feasible way to get out of debt without bankruptcy, it is something worth considering.
But bankruptcy isn’t a permanent black mark against your credit, either.  I tell my clients to think of bankruptcy as a reset button on a video game.  You start with a clean slate – just like when you turned 18.  No credit.  You start over and build a new history.  If you happen to have a preexisting debt that will survive the bankruptcy (mortgage, car loan, student loan, etc.), that will help you rebuild even faster.
I’m not in trouble… yet.
If you think you’re headed down a path where bad things are going to happen, talk to an attorney now.  Don’t wait until disaster strikes.
  • Has a creditor filed a lawsuit against you?  They may be looking to garnish your wages.  Why wait until after your wages have started to be garnished before speaking to an attorney?
  • Have you not paid your utility bills all winter?  Your services will likely be disconnected on or after April 15.  Why wait until April 14 to do something about it?
  • Are you behind on your car payment?  In Wisconsin, it doesn’t take long for a creditor to repossess a car.  If they do, you have a very short window (and limited possibilities) to get it back.
  • Are you falling behind on your mortgage payment?  Foreclosure takes a bit longer in Wisconsin, but the longer you wait, the more expensive it could be to stop the foreclosure action.  Don’t gamble with your home by waiting until the eve of the Sheriff’s Sale to speak to an attorney.

It doesn’t necessarily have to take a long time to file a bankruptcy case.  But to do it properly, you should plan on meeting with an attorney several weeks (if not months) before you need to file for bankruptcy.  Why so long?
Chances are that you are not your attorney’s only client.  Your attorney will need time to prepare a proper petition for you, to review all of the relevant documents and information you provide, and to advise you accordingly.  If you drop a case in your attorney’s lap and expect him to drop everything and file a case for you in 24 hours – you can expect the quality to suffer, and you can expect problems.  In fact, I would urge you to avoid any attorney willing to file a case that quickly.
Furthermore, you are going to have certain obligations and responsibilities in bankruptcy.  You’re going to want time to digest these, and make sure that you’re making the right decision before you commit to filing your bankruptcy petition.
Okay, I want to file bankruptcy.  Here’s some information.  Get it done for me.
Bankruptcy is a privilege, not an absolute right.  And it’s a privilege that usually confers a tremendous financial benefit.  In exchange for that benefit, the bankruptcy court is going to have some expectations of you.  They expect a full disclosure of your income, assets, and debts – to determine what, if anything, you can reasonably be expected to pay on your debts.  They also expect you to conduct yourself in a manner that doesn’t unfairly and unjustly impact your creditors (meaning not racking up a bunch of debt right before you file your case, not paying certain creditors at the expense of others, and not selling or giving away valuable assets).
Your attorney’s job – my job – is to help guide you through this intensely bureaucratic process; to advise you to avoid legal pitfalls; and to make sure that you follow the laws and procedures properly.  But that doesn’t mean you can sit back and not take an active and serious role in your own case.  If you cannot bring yourself to disclose information or to follow explicit instructions and advice from your attorney, then you may want to seek some other form of debt relief with less rigid expectations.

A side-by-side comparison of Chapter 7 and Chapter 13 Bankruptcy.


Chapter 7
Chapter 13
Generally
Liquidation of non-exempt assets, discharge of general unsecured debts.
Reorganization and repayment plan.  Debts split into categories. Some paid in full, others paid a percentage based on income and other factors.
Duration
Time between filing and discharge is approximately 4 months.
Time between filing and discharge is approximately 3-5 years.
Cost
Cheaper
More Expensive
Income
Must be below median or be able to “beat” the Means Test.
Surplus disposable income on either the Means Test or the budget.
Prior Bankruptcy
Ineligible to file if filed a prior Chapter 7 in the last 8 years or a prior Chapter 13 in the last 6 years.
Eligible to file even if not eligible for a discharge. Eligible for discharge 4 years after prior Chapter 7 or 2 years after prior Chapter 13.
Assets
If equity exceeds allowable exemptions, trustee can sell for benefit of unsecured creditors.
Assets are not liquidated, but repayment plan may require a minimum threshold paid to unsecured creditors to make them as whole as they would have been under Chapter 7.
Stay Protections
Both chapters stop collection efforts, lawsuits, wage garnishments, and utility disconnection.
Repossession & Foreclosure
Automatic stay suspends pending actions temporarily, but no adequate protection for arrears.
Arrears are cured. Foreclosure and repossession fully stayed pending successful completion of repayment plan.
Codebtor Stay
No
Yes
Other Issues
Preference payments, insider payments, transfers of assets, excessive gambling losses, and fraudulently incurred debt all pose the risk of adversary proceedings or denials of discharge.
Chapter 13 is sort of a fix-all remedy to anything that might be a problem in Chapter 7. Many issues become non-issues, or are mitigated with a floor amount paid to unsecured creditors spread out over the life of the repayment plan.
Discharge
Non-dischargeable debts simply survive the bankruptcy.
Certain non-dischargeable debts (priority debts, such as taxes and child support) are paid in full.  Other non-dischargeable debts (such as student loans) can be paid down concurrently with unsecured creditors.
Credit
Most people have improved credit scores about 12 months after bankruptcy is filed, assuming they have made payments on surviving debts (e.g. mortgages, car loans, or student loans).
Credit rebuilds a little faster in Chapter 13 than in Chapter 7.

  

More thorough lists of terms of art.

In bankruptcy, you hear frequently about “income”, “assets”, and “debts”.  And if the typical bankruptcy debtor was asked to disclose all of these without any further guidance, 9 times out of 10, that debtor would certainly be lost.  Because income means more than just your paycheck.  It can mean social security, business income, even loans and sale profits.  Property doesn’t just mean real estate, but includes vehicles, bank accounts, and stuff you don’t even possess yet, but have a legal interest in.
So what I thought I would do today is create lists of income and assets.  This is not the first time I’ve posted such a list.  But experience teaches us over time to add things to the list.  Still, do not rely on these lists to be entirely exhaustive.
Income
Employment (wages, salaries, commissions, tips, overtime)
Business Income (from a business you own or operate)
Rental Income from Tenants
Child Support, Alimony, or Maintenance
Pension
Social Security, SSDI, or SSI
Unemployment Benefits
Workman’s Compensation
Short or Long-Term Disability, VA Disability
Income from Trusts or Annuities
Public Assistance (food stamps, rent or utility assistance, etc.)
Household Contributions (assistance from friends/family to pay bills)
Profits from Sale of Assets
Gambling Winnings
Tribal Per Capita Income
Withdrawals from IRAs, 401(k)s, and Whole Life Insurance
Insurance Payouts
Non-PMSI Loan Income
Student Loans (not dedicated for tuition)  
Assets
Real Estate (residence, rental properties, business properties, hunting land, vacant lots, timeshares)
Vehicles (automobiles, motorcycles, ATVs, snowmobiles, boats and watercraft, trailers, campers, RVs, mobile homes, aircraft)
Cash in Wallets, Purses, and Safes
Bank Accounts (checking, savings)
Security Deposits
Sole Proprietorship Business Assets & Ownership Interest in Business Entity (LLC, Corp, etc.)
Stocks and Bonds
Cash Value Life Insurance
Retirement Accounts (pensions, 401(k)s, 403(b)s, IRAs, deferred comp, profit sharing, ESOPs)
Tax Refunds
Accounts Receivable
DSO Arrears
Marital Property Settlements
Potential Lawsuits (personal injury, breach of contract, etc.)
Potential Inheritances / Wills / Trusts / Annuities
Life Estates in Real Property
Sample Household Goods
Sofas, Loveseats, Recliners, Chairs, Ottomans
Coffee Tables, End Tables, Entertainment Centers
Desks & Office Furniture
Cabinets & Shelves
Beds
Pillows, Sheets, Comforters, Towels, & Other Linens
Dressers / Armoires
Dining Table / Chairs
Dinnerware (plates, cups, bowls, silverware, etc.)
Cookware (pots, pans, utensils, etc.)
Stove / Oven / Microwave
Refrigerator / Freezer
Other Kitchen Appliances
Washer / Dryer
Televisions
Computers & Peripherals
Phones & Cell Phones
Other Video Equipment (e.g. DVD Player)
Other Audio Equipment (e.g. CD Player, Radio, iPod)
Other Electronics (e.g. cameras, game consoles, etc.)
 Mirrors, Lamps, Clocks, Rugs
Vacuums
Power Tools / Maintenance Tools
Outdoor Furnishings (e.g. grills, adirondacks)
Lawn Mowers & Snow Blowers
Holiday Decor and Other Decorations
Pets
Plants
Clothing
Clothing
Wedding Rings & Jewelry
Books
CDs & DVDs, etc.
Photographs & Artwork
Bicycles
Firearms & Ammo
Hunting & Fishing Equipment
Sports & Fitness Equipment
Hobby Equipment & Supplies
Musical Instruments
Billiards & Game Tables
Collectibles & Antiques
Season Tickets (e.g. Packers, Brewers, Bucks, Admirals)
Farm Equipment / Livestock / Crops
Aggregate of Minor Miscellaneous Items (cleaning supplies, office supplies, etc.)
Remember that assets may be tangible or intangible, have cash or market value.  You may have legal or equitable ownership interest in the asset.  You may be the sole owner or a partial / joint owner.  You may own the asset presently, or have a contingent / future interest.  Also make note of assets you own that someone else is in possession of, and assets you are in possession of that you do not own.

Cancellation of Debt

It’s tax season, which means it’s time for our annual flood of questions about tax issues and bankruptcy.  One we get quite often is regarding the “Cancellation of Debt 1099’s” some people get after bankruptcy, and whether these are reportable income on your taxes.
Not being an expert at tax law, my answer is always going to be consult with a tax attorney.  However, I can tell you that the IRS exempts from income any discharge of debt arising from a case brought under Title 11 (see 26 U.S.C. § 108(1)(A)).  In other words, if your debt was discharged in bankruptcy, then no, you do not report the income on your federal taxes.

Side note: Title 11 and Chapter 11 are two different things.  Title 11 refers to the portion of the U.S. Code dealing with all federal bankruptcy laws.  Chapter 11, like Chapters 7 and 13, are types of bankruptcy referring to subsections of Title 11.  So no, do you do not have to file a Chapter 11 case for 26 U.S.C. § 108(1)(A) to apply!

The question is not so clear-cut when it comes to Wisconsin state income taxes.  For all the cases I’ve filed and all the years I’ve been practicing, I’ve only had a problem with this issue once.  But it is worth noting.
26 U.S.C. § 108 was amended by P.L. 110-142.  In determining what is computed as income,t he Wisconsin Legislature passed Act 28 in 2009, which created created Wis. Stat. 71.01(6)(u) and (um).   These two provisions exclude P.L. 110-142.
Did you follow all that?  Neither did I, really.  As far as I can trace the legislative history, basically, Wisconsin statutes now exclude the federal exclusion of taxable income, the double-negative thereby creating taxable income out of debts discharged in bankruptcy.  But again, it’s a very convoluted series of statutes, which is why I refer you to speak to a tax professional.

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.