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The Chapter 7 bankruptcy "Means Test":
All Chapter 7 bankruptcy filings are now subject to the "Means Test". The means test determines whether you will be allowed to file a Chapter 7 bankruptcy and depends on your family income, family size, and family expenses.
If your household income is greater than the Washington state median income for a family of your size then your creditors, the court, or the bankruptcy trustee may request that the court dismiss your case due to “abuse".
This is not, however, a complete dead end. A request for dismissal of your Chapter 7 bankruptcy can be rebutted by demonstrating that your monthly expenses justify filing a Chapter 7 case.
The state median income is determined by the Census Bureau and is based on gross NOT net income.
In applying the means test, the new bankruptcy laws consider your six-month average income at the time of filing. This can be problematic if your income was well above the Washington state median recently but has just dropped in the last few or even several months. In any case, if you have had a major income drop within the past six months, we will need to discuss it during your initial consultation.
How do I know if I am below the Washington State median income?How do you know if you are below the median income? In general, you total the gross income you received (not take home income) for each month for the 6 months preceding the month you filed the bankruptcy. Then, you double that number to get an annual number.
There are several special adjustments that could apply in certain circumstances, such as if you are self-employed, were unemployed during that 6-month period, or received social security and/or disability income.
Presumably, if your adjusted gross household income is below the median income, you are eligible to file a Washington Chapter 7 bankruptcy petition.
It is important to note that because the gross income number is calculated based on the six-month period preceding the date of the bankruptcy filing, the timing of your case can be absolutely critical. This is why it is important to consult an experienced bankruptcy attorney with the resources and the experience to properly evaluate your case.
For example, if you had an unusually high or an unusually low income at any time during the preceding 6 months, this will directly affect your eligibility to file a Washington Chapter 7 bankruptcy.
And, if you are not eligible to file a Chapter 7 bankruptcy, the amount and timing of your income during the preceding six months can will directly impact your payment under a Washington Chapter 13 bankruptcy and proposed repayment plan.
Furthermore, if your adjusted gross household income is over the median household income, you must calculate whether or not you can "afford" to make a monthly payment under a Chapter 13 bankruptcy and whether that payment will be sufficient to provide a benefit to the creditors.
The new bankruptcy law also provides a specific list of permissible expenses that you may claim as deductions from your current monthly income. A detailed review of all of these expense and deduction calculations is not feasible here. Again, an experienced bankruptcy attorney can guide you through this calculation step by step and advise you accordingly.
In general, however, it is permissible in a Chapter 13 bankruptcy to count the full amount of your house payment (but not necessarily the full amount of your rent payment if you are renting), and the full amount of your car payments (but not necessarily the full amount of your lease payment if you are leasing).
There are also additional specific allowances in Chapter 13 bankruptcy. These allowances include food, utilities, clothes, transportation and other living expenses, as well as the normal amounts deducted from your paycheck for items like taxes and insurance.
In a Chapter 13 bankruptcy, however, you are not allowed to deduct amounts that you are paying to unsecured credit card debts. The overall calculations is further complicated because the amounts of the allowances for various items change depending on your income level and family size. They may also change depending on the Washington state county in which you reside.
If you have certain kinds of priority debts, like past due income taxes or child support, you can deduct those as well.
If you own your home or your car free and clear, you can nevertheless take a deduction for the allowed ownership cost for the home or vehicle. If you are receiving child support, repaying a 401(k) loan or, making contributions to a 401(k), you may also be able to deduct some or all of these amounts.
The bad news is that the new laws essentially require the bankruptcy court to presume that you are not eligible to file for a Chapter 7 bankruptcy if your current monthly income should, after deducting permissible expense amounts, leave you with at least $100 per month to be repaid to your creditors. In such cases, you will have to repay at least $6,000 over as long as five years through a Chapter 13.
In order to successfully argue against dismissal or conversion of your case to Chapter 13, you must be able to demonstrate "special circumstances that justify additional expenses or adjustments of current monthly income." And even if your income falls below the state median, the court may still dismiss your case for “abuse”.
QUALIFYING FOR A CHAPTER 13 BANKRUPTCY UNDER THE NEW LAW
The new bankruptcy laws provide different treatment for persons in a Chapter 13 bankruptcy, depending on whether their gross income is over or under the state median income.
In general, if your gross income is less than the state median income, the new provisions in Chapter 13 will not substantially affect the amount you pay to unsecured creditors in your case.
If your gross income is over the state median income, however, Chapter 13 requires an entirely new method of calculating your payment amount. The new law requires that the debtor calculate a monthly disposable income amount based on the same calculations described above for computing whether you are eligible for Chapter 7 bankruptcy.
If you are not eligible to file a Chapter 7 bankruptcy, you simply multiply the monthly disposable income by 60 to produce the total amount that must be paid to unsecured creditors under your Chapter 13 bankruptcy.
It works like this. Let's say your monthly disposable income is $200. In this case, you must pay therefore $12,000 ($200 x 60 months) to unsecured creditors in your Chapter 13 plan.
The law seems to indicate that the $12,000 total in this example would include attorneys' fees and other administrative costs. You may pay that amount in monthly installments over as short a period as you like or you may pay it for a period not to exceed 60 months. If you also need to include payments on secured debt (such as past due car or house payments), then these amounts will in turn increase your monthly payment to the Trustee. Payments on houses and cars are also subject to additional rules that we will discuss with you during your initial consultation.
The new laws also did away with certain other dischargeable debts that you may have heard about under the old bankruptcy. For example, income taxes for periods more than 3 years old but for which no return has been filed, debts arising by fraud or damage to another person's property, debts owed to a single creditor totaling more than $500 for luxury goods incurred within 90 days of filing, and cash advances of $750 within 70 days all are non-dischargeable in Chapter 13.
TIME BETWEEN FILING CASES
If you have previously filed for bankruptcy before, certain other restrictions may apply.
For example, you will not be eligible to receive a discharge of your debts in a Chapter 7 bankruptcy if you received a prior discharge within 8 years of the new filing.
Additionally, you will not be eligible to receive a discharge in Chapter 13 if you have filed a Chapter 7, 11 or 12 bankruptcy case within the 4 years prior to the date of filing of the pending case, or if you have filed a Chapter 13 case within 2 years of the pending case.