Updated Median Income Standards

The median income standards for determining if you qualify for Chapter 7 bankruptcy will increase on November 1st, 2018. The standard looks at two things, household size and gross income. It is increased periodically to account for inflation and increased cost of living.

The new standards are as follows:

  • Household of 1 person: $53,803.00

  • Household of 2 persons: $65,060.00

  • Household of 3 persons: $80,551.00

  • Household of 4 persons: $97,692.00

Each additional household member will allow an additional increase in household income of $8,400.00.

A few important things to note. First, household size is determined primarily by whether or not the adults living together are married, and whether or not the children in the household are claimed on the federal income taxes as dependents. So, if a married couple has two kids who are both claimed on their taxes, the household size is four. If a single, divorced person lives with their child part-time, but does not claim the child on their taxes, it is a household of one. There are more complex situations that can be discussed with your bankruptcy attorney, but this is just a broad, brief overview.

A second thing to note is that the household income will look at all types of income for BOTH spouses, whether they are filing for bankruptcy or not. Income includes, but is not limited to, bonuses, unemployment, self-employment, side jobs, Social Security, and pensions. If one spouse has a large income, but no debts, the bankruptcy court will still consider their income in the household total. Income has a broad definition in bankruptcy, if you have any doubt, ask your attorney.

A third important thing to note is these standards refer to gross income, which means your income before taxes. This is very important to keep in mind, as net (after-tax) income can be dramatically different. Many people think of their “income” as the amount of money they take home, but in bankruptcy on the means test, it will refer to your income before taxes.

In any case, your attorney will need to closely review your income to make sure you fall below the median income standard, so always be ready to gather up six months of paystubs. And remember, even if you go above the standard, you may still qualify for a Chapter 13 bankruptcy.

Contact us if you have any questions about whether or not you will be below the median income standard.

Can You Get A Car In Chapter 13 Bankruptcy

Chapter 13 bankruptcy typically runs three-to-five years. During this time, cars can die and break down. A common concern for Chapter 13 filers is whether or not they can get a new car loan after filing. The answer is "yes", but there are some limitations.

In order to finance a vehicle in Chapter 13 bankruptcy, the attorney of the filer must get Bankruptcy Court permission to do so. This is done by filing a motion and getting a signed court order. You should give your attorney as much heads up as possible that you will need a new car, as preparing this motion can take some time, and the court will need to review it, even if it is filed on an expedited basis. Don't call your attorney at the last minute. You should give him or her a month of notice, if possible.

What will the court consider in deciding whether to allow someone to finance a vehicle in bankruptcy? First, they will need to see that payments in the bankruptcy case are current. If you are behind on the payments, the court will not allow you to take out new debt, no matter how badly you need the car. If you are behind a couple payments, you will need to catch them up.

Second, the court will need a reason that the new car is needed. It doesn't need to be anything dramatic or long-winded. Typical reasons include your old car permanently breaking down or a change in life circumstances that would require a new car (for instance, taking a job outside of the bus line). The court will probably not accept the request if the reason is that you don't like your car, or you want a nicer car. It has to be a necessity.

Third, the court will place limits on how much you can finance, regardless of how much you make. The current limits are $25,000 total financed, and/or a payment no larger than $400 per month. This may limit what you want, but it is likely non-negotiable with the court. A large finance payment will not be permitted.

Once the court grants your motion, you will need to find a dealership that is willing to finance through Chapter 13 bankruptcy. They exist, but they will likely charge a very high interest rates, and you may need to shop around. The interest rates are sometimes over 20%, which can make a car prohibitively expensive in Chapter 13 bankruptcy. For this reason, it is almost always preferable to try and make it through your Chapter 13 bankruptcy with your original car.

After securing financing, a second motion must be filed with the court approving the loan. As mentioned earlier, the court will only approve the financing if it is for less than $25,000 and less than $400 per month. Once this motion is approved, your bankruptcy plan must be amended to incorporate the new payment. Obviously, it will need to be an amount you can afford. You will need to make the payment directly until the payment is made by the Trustee.

If you are married, and only one spouse needs to file, the non-filing spouse may secure financing outside of bankruptcy. This will be much easier, and it will not require you to include it in the bankruptcy. This is something to keep in mind when filing.

You can buy a car in Chapter 13 bankruptcy when the need comes up. But, it must be necessary, and there will be limits to what you can buy. If you are considering bankruptcy and believe this may be an issue, contact us to set up a free consultation.

Possible Relief For Student Loan Debts? Don't Count On It... Yet

The Wall Street Journal recently published an article claiming the Trump Administration is considering relaxing the "undue hardship" standard for discharging student loan debt in bankruptcy. This would be a major change in long-term bankruptcy law, as Congress has shown little willingness to provide this relief. But, it does provide a glimmer of hope for millions who sink deeper into student loan debt.

READ THE ARTICLE HERE: Trump Administration Looking At Bankruptcy Options For Student Loan Debt.

The "undue hardship" standard makes it extremely difficult to discharge student loan debts through bankruptcy. The Debtor must face a severe hardship which prohibits them from paying the debt while also maintaining minimal living standards, the hardship must be long-term, and the debtor must have made a good-faith effort to repay the debt. As discussed in the article, proving this is difficult and costly, so much so that only 500 debtors even attempted it last year. In practice, it is not an option for the neediest consumers.

Congress must approve any permanent change, but the president can set enforcement policy to a more lax standard. Major bankruptcy reform last occurred in Congress in 2006, and even then it was mostly favorable to creditors. However, a strong push from the president could lead to popular support, especially among Congressional members in close electoral races.

This development is probably not reason to get too excited if you are facing large student loan debts, at least not yet. First, the president has been prone to bold declarations during his first year in office that are quickly forgotten, or there has been a lack of policy follow through. Second, as mentioned above, Congress would need to approve any sweeping or significant change beyond enforcement, and the creditor lobby has so far been stronger than the consumer lobby. Recent efforts have stalled, and there is no indication there is any momentum for change.

Finally, if the focus of relief is truly on the undue hardship standard, as opposed to broader change directed at different student loan situations, many consumers may still be beyond help. For instance, what will the new standard require? Will under-employment qualify, or must you be disabled or unemployed? What will constitute a "good-faith effort" to repay? Or will you even be required to make one? Not everyone who is overwhelmed by student loan debt is in the midst of severe hardship, but millions find the debt inflexible and oppressive. 

While this may be a negative view of the situation, it is realistic for any bankruptcy attorney. Congress just has not shown the willingness to do anything in this area. However, this may be an opportunity for rare bipartisan action, as this effort has so far been taken up by more liberal members. As student loan debts balloon to astronomical levels, effecting more and more voters, Congress may finally be forced to act, even if it is just to curry favor at the polls. Democrats and Republicans both hear the cries of student loan debtors.

Student loan reform in bankruptcy is inevitable in the long run, but cold cynicism tells me, "not yet".

Contact us if you are facing student loan debt, or any type of debt. I would be happy to discuss your options during a free consultation. 

The Bankruptcy "Liquidation Test"

The value of your personal property is always important in bankruptcy. Your property can be protected and exempted from your creditors in bankruptcy, but the exemptions are limited. For instance, if you own a $100,000 house, but owe $90,000 on the mortgage, your $10,000 in equity can be adequately protected from your creditors. However, if you own the same home outright, without a mortgage, your $100,000 in equity is too great to fully protect, depending on the exemptions being used (different exemptions can be used in different circumstances, but that is the subject of another post).

So, what happens when your property is not fully protected? You do NOT have to surrender the property. Instead, you may file a Chapter 13 bankruptcy and submit to the so-called "liquidation test". This test is enumerated in the bankruptcy code under section 1325(a)(4). The liquidation test requires that unsecured creditors (such as credit cards and medical bills) must be paid at least as much in a Chapter 13 bankruptcy plan as they would be paid in a Chapter 7 liquidation, minus any administrative or sales costs.

In practice, this means you must repay your unsecured creditors, dollar-for-dollar, the amount your property would be worth were it to be sold to pay off your creditors, minus whatever is exempted, whatever it is secured by, and whatever costs would be involved in the sale. For instance, if your home is worth $100,000, but you owe $50,000 on the mortgage, and the homestead exemption is $26,000, you must pay your unsecured creditors $24,000, minus estimated sales costs. If you owe your unsecured creditors $24,000 or less, they will be paid in full. If you owe them more, they will be paid a portion of what they are all owed, out of the $24,000 pool.

It should be noted, the exemptions for personal property, such as furniture, clothes, jewelry, tools and household goods, etc. are normally more than sufficient. Also, retirement accounts are usually completely exempt. It is homes, rental properties and cars owned outright that cause the greatest problems with exemptions. It will be important to disclose all property you own to your attorney to guarantee that it all accounted for and protected.

The liquidation test sometimes makes it important to get an appraisal of your home. Appraisals can cost several hundred dollars, but it may be worth it if the results save your thousands (or tens-of-thousands) under the liquidation test. If you only roughly estimate the value of your home, you take the risk of the trustee challenging your case. Precise numbers and amounts will reduce uncertainty.

Contact us if you believe the value of your property could cause a problem with the liquidation test. I will be happy to sit down and review your situation during a free consultation. We can determine if your property will be fully, or partially, exempt. We can plan a Chapter 13 bankruptcy to protect your property if it cannot be protected. We may even determine that your property is not worth liquidating, which will allow you to file a Chapter 7 bankruptcy.