Los Angeles Bankruptcy Law Monitor : Los Angeles Bankruptcy Lawyer & Attorney : Christine Wilton Law Firm : Southern California Chapter 13 & Chapter 7 Bankruptcy, Foreclosure

 In Chapter 7 Basics, I wrote briefly about the means test that was created in 2005 under BAPCPA where MBNA Bank, N.A. worked hard to make it more difficult for consumer debtors to qualify to file bankruptcy under Chapter 7 and created more disposable income to pay creditors under Chapter 13. It's interesting to note that this same bank who help draft the bankruptcy rule changes is now the subject bank in the Ransom case, which is to be decided by the Supreme Court early next year.

The lower 9th Circuit Court ruled in Ransom v. MBNA Am. Bank, N.A. (In re Ransom), 577 F.3d 1026 (9th Cir., Aug. 14, 2009) that an above-median debtor could not claim the ownership deduction of a vehicle in a means test calculation even if that debtor owned his vehicles free and clear and was not making payments on a vehicle. Other lower courts, including the 8th Circuit ruled the exact opposite.  It is this split of the lower courts that prompted the Supreme Court to hear the case.

The question presented before the Supreme Court is Whether, in calculating the debtor's "projected disposable income" during the Plan period, the bankruptcy court may allow an ownership cost deduction for vehicles only if the debtor is actually making payments on the vehicles. There are several compelling arguments to be presented as both common sense and following the letter of the law.  A Note to Big Banks:  The law is both a shield and a sword.  Even though you did your best to make these changes to the law bend at your whim, we Consumer attorneys will continue to point out the error of your ways!

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The bankruptcy rule changes from Bankruptcy Abuse Prevention and Consumer Protection Act 0f 2005, or BAPCPA, created the Means Test formula for determining whether a consumer qualified to file bankruptcy under Chapter 7 of the Bankruptcy Code. Basically, the means testing requires that the debtor’s income must be below the median level for households, using Census Bureau and IRS standards. 

Based on your current income and expenses you have determined that you qualify to file bankruptcy under Chapter 7 and file your case in good faith. Now, enters the United States Trustee. The Trustee’s role in a Chapter 7 case, is to determine whether your estate has any assets that can be sold to pay your debts, or whether you have income to pay at least a portion of your debts, pursuant to 11 U.S.C. § 707(b)(3)(B). 

A June, 2010 decision by Bankruptcy Judge Randall L. Dunn, in In re Stubblefield (Bankr. D. Or. 2010) granted the U.S. Trustee’s motion to dismiss the debtor’s case pursuant to Section 707(b)(3) because the debtor’s ability to pay creditors through Chapter 13 is of primary importance when considering whether the Chapter 7 filing is an abuse. The Court determined that although the debtor’s income had declined, under the totality of the circumstances and using the six factors outlined in Price (In re Price, 353 F.3d 1135 (9^th Cir. 2004)), the debtor’s ability to pay a substantial portion of her unsecured debts was of primary importance. 

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In determining eligibility to file for a chapter 7 bankruptcy, the basic qualifying factor is income under the Means Test as set forth in 11 U.S.C. 707(b)(2).  The debtor's income must fall below the Census Bureau's Median Income by Family Size.   Thus, the Means Test is a two prong test:

• The first prong being the size of the household; and

• The second prong being that of the debtor's gross income for the six months preceding the bankruptcy filing. 

Debts generally not dis chargeable in Chapter 7 bankruptcy include:  taxes, child or family support payments, student loans [absent undue hardship], traffic tickets, government fines, alcohol related accident judgments, judgment for willful or malicious conduct resulting in serious physical injury or death.

Debtors are required to submit a copy of their recent tax transcripts to the Trustee prior to the meeting of creditors, 11. U.S.C. 341(a).  A copy of the tax transcripts can be obtained by the debtor by calling the IRS 1-800-829-1040 and the debtor can even authorize the transcripts be faxed directly to counsel.  The IRS attorney line for transcripts is 1-866-860-4259. 

In California, their are certain exemptions that can be taken under California Code of Civil Procedure Sections 703, 704.  Exemptions allow a person to keep certain assets after the bankruptcy.  You must select only one set of exemptions.  If spouses are filing jointly, they must select the same set of exemptions.

A qualified bankruptcy attorney will review your individual financial situation and determine whether you qualify for chapter 7 or need to file chapter 13 bankruptcy.   

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New median income figures take effect November 1, 2009.  The change in median income levels will have a direct impact on those seeking debt relief through chapter 7 bankruptcy because of the means test.  Individuals seeking to file chapter 7 bankruptcy must pass the means test   in order to qualify; otherwise they will be required to file under chapter 13 and make some payments toward their debt.  Not since the inception of Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA") in 2005 have we seen the income figures drop.  What this means is that those seeking debt relief under Chapter 7 bankruptcy, may soon be disqualified and forced to file under Chapter 13 instead.

Here in California, our current unemployment rate is 12.2%, according to the Bureau of Labor Statistics.  Our real estate market still has not bottomed out as those in the industry project a Gloomy Outlook.  Lenders have been stalling out or flat out refusing to modify mortgages that would otherwise qualify under the Obama Plan and more foreclosures are coming soon.  Also, our state workers have taken approximately 3 furlough workdays without pay, which equals an approximate 14% pay cut.  No wonder the median income figures are dropping. 

It's time to review those borderline Chapter 7 cases pending and get them filed before the client potentially becomes disqualified under the new changes taking effect November 1st. I don't think it's Bankruptcy Means Test Irony as the folks over at Bankruptcy Law Network do; it's the factual truth.

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