Bankruptcy Income Means Test Description
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
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.
C Property Claimed As Exempt Official Form Guideline
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.
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.
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
- Current Market Value $2,000
703.140(b)(4) - Exemption Claim $1,000
Cal CCP 703.140(b)(5)
- Exemption Claim $500
7031.40(b)(1) - Exemption Claim $500
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.
Schedule C forms (Official Form B 6C) are available from the federal government
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.
Categorization Schedules D E F G Description
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
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.
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.
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
9 Priority Classifications (Debts Owed
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
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
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
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:
Is this a secured debt?
… If yes then add to Schedule D … If not then go to (2)
Is this a priority debt?
… If yes then add to Schedule E … If not then go to (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
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.
Our 10 Step Bankruptcy System educates and assists you in completing dozens of complex bankruptcy forms; producing 75 to over 100 pages of court ready documents.