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)

Median Income Levels eff 4/1/2015

The Census Bureau has updated the median income levels.  These new numbers go into effect April 1, 2015.  Median income levels are dictated by the state you reside in and the size of your household.  If you are below median, you are presumed to qualify for Chapter 7 Bankruptcy.  If you are above median, you are presumed to need to file under Chapter 13.  Both presumptions can be refuted under certain circumstances.

The median income levels for Wisconsin will be as follows:
Household of 1: $43,666

Household of 2: $59,740
Household of 3: $69,600
Household of 4: $83,686
+1: +$8,100
Also, due to standing weekly obligations, office hours on Tuesday end at 6:30pm and on Friday at 4pm.  These hours have actually been observed for quite some time, but now they’re official.

Form Modernization Update

Implementation of the proposed National Model Chapter 13 Plan has been pushed back another year – with an expected roll out date of December 2016 (2 years from now).  As near as I can tell, the proposed rule change that would shorten the time period that creditors have to file proofs of claim in Chapter 13 Bankruptcy has also been delayed.
Last year, we were introduced to “modernized” Schedules I & J.  We got a sneak peak at the amended forms being rolled out this year (December 1, 2015).  It isn’t the full set of schedules that we were told to expect last year.  But we are getting a new Means Test (Form B22A in Chapter 7 and Form B22C in Chapter 13).  The Means Test has actually now been split into two separate forms.  If you’re below median, you don’t complete the second form.  If you’re above median, you do complete it.
This is not entirely different from the old forms (below median debtors didn’t complete the second part of the form).  The only real difference here is that the unnecessary second half of the Means Test would not be printed with these new forms.  As benign as this change is, it’s actually nice because we’re expecting most of the modernized forms to cause the average bankruptcy petition to double in size (from about 60-80 pages to 100-120 pages).  For below median debtors, the new Form B22’s will shorten the overall petition slightly.

November 2014 Median Income Levels

Median income levels are set for their semi-annual change on November 1, 2014.  In Wisconsin, for household sizes of two and three, the change is negligible.  Households of four and greater will find it slightly easier to qualify for Chapter 7.  The biggest impact will be on households of one, where the median is dropping almost $2k.
Old Numbers:
HH1: $44,602
HH2: $58,751
HH3: $68,801
HH4: $81,373
New Numbers:
HH1: $42,969
HH2: $58,786
HH3: $68,489
HH4: $82,350
Debtors must report their annualized gross income based on their past six months of income.  Above-median debtors are presumed to have to file for Chapter 13 Bankruptcy and below-median debtors are presumed to qualify for Chapter 7 Bankruptcy (although both presumptions can be rebutted).  Median income levels vary by state of residency and household size.

April 2014 Median Income Levels

Median income levels are due up for their semi-annual change on April 1, 2014.
The new Wisconsin numbers are as follows:
Household Size of 1 = $44,602
Household Size of 2 = $58,751
Household Size of 3 = $68,801
Household Size of 4 = $81,373
+1 = +$8,100
Across the board, these new numbers are higher than the existing numbers.  The median income level is a starting presumption as to whether you qualify for Chapter 7 Bankruptcy or must file Chapter 13 Bankruptcy based on income considerations.  Your income relative to the median income level is not the only consideration, as certain factors can tip below median debtors into Chapter 13 and above median debtors into Chapter 7.

On the Means Test, is it my gross income or net income that is considered?

Probably the biggest change that came down with BAPCPA was the imposition of a Means Test – a long form used to determine disposable monthly income (aka – how much money, if any, a debtor in bankruptcy could afford to pay his or her unsecured creditors).
Below median debtors only have to complete the first three sections of Form B22A (Chapter 7) or B22C (Chapter 13), to show that they are indeed, below median.  If below median, the rebuttable presumption is that they cannot afford to pay anything to unsecured creditors.  Above median debtors must complete the remaining sections of the forms to determine what, if anything, they can afford to pay.
People tend to get angry when they learn how much we rely on their gross income figures, because obviously – after taxes and other deductions like health insurance – they are not seeing as much money as is being reported on their bankruptcy forms.
So why do we use gross income on the Means Test?  For purposes of comparing your income to the median income level, the reason is simple – so we can compare apples to apples, instead of apples to oranges.  The median income level figures are gross income figures, not net.  It would make no sense to compare your net income to the median gross income.
If and once we establish that you are above-median and move on to the rest of the Means Test to determine monthly income, we still start with gross income, and not net.  Why?  Because you can have income over-withheld for taxes, which artificially makes your income appear smaller than it is (resulting in a tax refund at the end of the year).
But – that doesn’t mean that your ability to pay is being determined without any due consideration for your tax withholdings or deductions.  As you proceed throughout the Means Test, most of the same deductions that appear on your paycheck (resulting in your net income) are factored back in – so long as they are necessary and valid deductions.  Your taxes are also deducted back out on the Means Test at Line 30.  However, we do not use your tax withholding numbers (since they can be artificially inflated) but instead, we use your estimated actual tax liability.  Theoretically, if the number is calculated accurately, and if your adjusted your withholdings accurately, you would have no tax refund at the end of the year, but you would have a little more net income, which would be more in line with the result on the Means Test.
When your attorney insists that your income documentation includes information regarding your gross income, it isn’t because we’re trying to inflate what you actually make.  We need to be able to compare like things – your gross income to the median gross income.  We also need to determine if your income has too much withholding for taxes.  Yes, we rely heavily on gross numbers when calculating disposable income, but that doesn’t mean that your tax and insurance deductions are being ignored.

November 2013 Median Income Levels

About twice a year, we get new median income levels.  For bankruptcy purposes, being below the median income level presumptively means you qualify for Chapter 7 (though it is possible to be below median and still have to file Chapter 13 for income reasons – read here).   Being above the median income level presumptively means you have to file under Chapter 13 (though it is possible to beat the Means Test or rebut the presumption).
Median income levels vary by state and by household size.
The next change goes into effect November 15, 2013.  In Wisconsin, it will be slightly easier for households of 1 and 3 to get into Chapter 7, and slightly tougher for households of 2, or 4+.
Old Numbers:
HH1 – $43,661
HH2 – $58,668
HH3 – $65,775
HH4 – $81,296
New Numbers:
HH1 – $43,958
HH2 – $57,903
HH3 – $67,808
HH4 – $80,198
(For household sizes larger than 4, add $8,100 per additional member of the household.)

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.

Lanning… for Chapter 7

We have just celebrated the three year anniversary of Hamilton v. Lanning, the U.S. Supreme Court decision that finally put to rest whether bankruptcy judges had authority to consider factors other than historical data when computing projected disposable income in a Chapter 13 Plan.  In the decision, the Court asserted that judges could consider factors that were known or virtually certain, and adjust the Means Test result accordingly.
That’s fine and dandy for someone who wants to be in Chapter 13, but disputes how much money they can afford to pay unsecured creditors.  What about the individual who believes that they cannot afford to pay anything to unsecured creditors, yet an inaccurate means test is showing that they have too much disposable income to qualify for Chapter 7?
The answer to that conundrum has existed all along in the nearly 8 years since BAPCPA was enacted.  11 U.S.C. § 707(b)(2)(B).  In a similar fashion, debtors may file a rebuttal of the presumption of abuse to show why certain figures on Form B22A should be allowed to deviate from the formulaic approach.  This is most effective if the debtor had a source of income within the past six months, but that source of income no longer exists and is skewing the means test result.  The change is relatively easy to prove and justify.
You should still expect that the U.S. Trustee (who, by the way, is not the same as the trustee who has been assigned to administer your case) will file a Statement of Presumed Abuse – which is often a procedural placeholder that is filed with the Bankruptcy Court, allowing the UST time to investigate your case a little more closely.  If the rebuttal form is appropriate, the UST won’t challenge it.  But if the UST feels that the Chapter 7 filing is abusive, they will either file a motion to convert the case or a motion to dismiss the case, and have 30 days to do so from the time they file their statement.

April 2013 Median Income Levels

Wisconsin debtors trying to squeeze into a Chapter 7 will have an easier time with it come April 1, 2013.   Across the board increases, plus an increase in the credit for households larger than 4 people.
Again, these numbers are only for Wisconsin residents.
Household of 1: $42,776
Household of 2: $57,479
Household of 3: $64,441
Household of 4: $79,648
Greater than Household of 4: + $7,500 each additional person.
NEW (effective April 1, 2013)
Household of 1: $43,661
Household of 2: $58,668
Household of 3: $65,775
Household of 4: $81,296
Greater than Household of 4: + $8,100 each additional person.