Bankruptcy Income Means Test Description & Resources

Bankruptcy law changed in 2005 adding an income means test to qualify to for immediate bankruptcy protection pursuant Chapter 7 to cancel dischargeable debts. Those who do not qualify have the option of filing for bankruptcy under Chapter 13 with a three or five year payment plan before debt cancellation. The law established this test as an obstacle to curb bankruptcy protection at the behest of the financial industry and to the detriment of honest but unfortunate persons.

The income means test determines whether an individual seeking Chapter 7 Bankruptcy protection is presumed abusive (not okay to file under Chapter 7) or presumed not abusive (okay to file under Chapter 7). This determination is only an assumption and may be reversed during the bankruptcy process. Consequently, a presumption that is not okay to file under Chapter 7 is not the end.

The income means test presumption of abuse or non-abuse depends on various demographic factors. These include debtor age, income, expenses and family household size compared to standards set by the IRS.  To illustrate, the age of household members impacts allowable out of pocket health costs; county of residence and household size determines acceptable mortgage, rent and utility expenses; state and household size sets median income levels. Other routine expenses such as transportation, food, clothing, household supplies and personal care are similarly standardized.

The income means test is parsed into eight sections over nine pages. The sections cover military exceptions, comprehensive income calculations, standardized living expense deductions, secured debt payments and declarations under penalty of perjury. The income sections summarize household revenue from every possible source whether wages, business, rent, dividends, royalties or retirement. The standardized deductions cover, for example, childcare, taxes, court-ordered payments, limited education expenditures and insurance plus other living expenses limited to government averages. The government standards and formulas are online with the Office of the US Trustee at DEPARTMENT OF JUSTICE INCOME MEANS-TEST DATA.

In the end, you should qualify for immediate Chapter 7 Bankruptcy protection if your household income is less than or equal to the median income for your state of residence and family size. Otherwise, the means test engages in a complex calculus to compute your disposable income after paying standardized expenses.

Free incomes means test forms (Official Form B 22A) are available from the federal government at CHAPTER 7 STATEMENT OF CURRENT MONTHLY INCOME AND MEANS-TEST CALCULATION. Additional materials and books are online including software fully automating completion of Income Means Test.

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Bankruptcy Schedule C Property Claimed As Exempt Official Form Guideline

Bankruptcy law provides protections so people do not lose the necessities of life including items such as clothing, shelter or a single car. The law has been extended to protect people from losing their jobs or retirement accounts. These legal protections are referred to as bankruptcy exemptions. Exempted items are free from liability and beyond the reach of creditors. The official form used to demonstrate why persons filing for bankruptcy, debtors, are allowed to keep certain real estate and personal property (“items”) is Schedule C Property Claimed As Exempt.

Schedule C is deceptively simple looking because substantial legal analysis is essential to properly complete the form to maximize protections. Debtors must describe each item then specify the applicable exemption law and indicate the dollar value of the exemption for the particular item.

Schedule C - Descriptions of Property

Schedule C requires listing descriptions of all real estate and personal property items which debtors claim they may keep as exempted. The guideline is to list items separately including real estate and valuable or unique personal property like a piano or antique stove. In certain cases, grouping related items is permissible like kitchenware, a compact disc collection or other household items. The rules for separating or grouping items vary according to the 35 bankruptcy personal property categories.

Schedule C - Specify the Law Providing Each Exemption and the Value of the Claimed Exemption

Schedule C requires exemption laws to be specified using legal citation such as “Cal CCP 703.140(b)(4)” along with the dollar value of the exemption claimed for the item. Bankruptcy exemption laws protect items up to a maximum dollar value which may vary according to demographics including age or familial status. Exemptions may only be used until the total dollar value of an exemption is exhausted.

To illustrate, a $1,000 dollar exemption for jewelry may protect two rings valued at $500 each or protect $1,000 of a $2,000 wedding ring. Adding to the complexity is that another exemption, such as a $500 wild card exemption, may be used to protect another $500 of the wedding ring. Further, if the wild card was not sufficient to fully protect the item, then a third exemption may be used and so forth. Consider the ensuing sample of an item protected by three different exemptions.

Wedding Ring - Current Market Value $2,000     

Cal CCP 703.140(b)(4) - Exemption Claim $1,000

Cal CCP 703.140(b)(5) - Exemption Claim $500

Cal CCP 7031.40(b)(1) - Exemption Claim $500

The more specific exemptions should be applied before more general ones, meaning for jewelry, the jewelry exemption should be utilized first followed by wild card or other applicable exemptions. Such layers of exemption law analysis coupled with the variations of each state are the reasons non-bankruptcy professionals struggle with this official form.

Free Schedule C forms (Official Form B 6C) are available from the federal government at SCHEDULE C - PROPERTY CLAIMED AS EXEMPT. Government bodies and private institutions provide bankruptcy exemption laws online. Materials and books are likewise available including software fully automating completion of Schedule C.

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Bankruptcy Debt Categorization Schedules D E F G Description

Debt categorization to the correct official form is crucial for a timely and successful bankruptcy petition. Debts include any current or potential claim, liability or financial obligation against a person filing for bankruptcy protection.

Persons filing for bankruptcy must itemize their debts on four mutually exclusive Official Form 6 Schedules: (1) Schedule D for secured debts (2) Schedule E for unsecured priority debts (3) Schedule F for unsecured non-priority debts and (4) Schedule G for ongoing contracts and leases. The bankruptcy court will then cancel the itemized dischargeable debts at the conclusion of the case.

Secured debts are those where real estate or personal property has been pledged as security interest (collateral) for the debt or loan, so that if the debt is not repaid, the creditor may take the collateral. The most common examples are home mortgages and car loans.

Unsecured priority debts are those falling within one of nine priority classifications. Debts within these classifications are granted preferential treatment in bankruptcy so those debts are prioritized and paid first from funds available to pay unsecured debts. The most common priorities individual persons encounter are taxes, domestic (spousal or child) support and debts due to driving while intoxicated.

9 Priority Classifications (Debts Owed By Debtors)

·         Domestic Support Obligations

·         Taxes and Certain Other Debts Owed to Governmental Units

·         Claims for Death or Personal Injury While Debtor was Intoxicated

·         Wages, Salaries, Commissions

·         Certain Farmers and Fishermen

·         Contributions to Employee Benefit Plans

·         Deposit by Individuals

·         Extensions of Credit in an Involuntary Case

·         Commitments to Maintain the Capital of an Insured Depository Institution

Unsecured non-priority debts are simply any remaining regular debts such as unsecured credit cards, medical bills or personal loans. One caveat however. Regular debts do not include those for ongoing contracts or unexpired leases where substantial performance is still required. This is best understood by example.

Ongoing Contracts and Unexpired Lease Examples

·         Motor vehicle leases or leases for other personal property

·         Timeshare contract for beach front vacation home

·         Contracts ordering furniture or other items not yet delivered

·         Layaway arrangements (contracts) at clothing stores

·         Apartment residential leases or leases for other real estate

·         Home Association Fee contract s

The question becomes how to select the proper Schedule (D, E, F or G) to list your debts. A reasonable approach is to evaluate each debt by starting with the first schedule then the next and asking:

(1)    Is this a secured debt?

… If yes then add to Schedule D … If not then go to (2)

(2)    Is this a priority debt?

… If yes then add to Schedule E … If not then go to (3)

(3)    Is this a regular debt or an ongoing contract or lease?

… If regular then add to Schedule F

… If ongoing contract or lease then add to Schedule G

Free Schedule C forms (Official Form B 6C) are available from the federal government at FORM 6 SCHEDULES D E F G. Reference materials and help books exist, but should this become too onerous, software automating the process is also available.

www.BankruptcyAdvantage.com