Charitable Contributions and Bankruptcy

Many of my clients are extremely generous people. They manage to help their children, other family members, friends, and even strangers despite their own financial problem. Some have possibly exacerbated their financial situation by being too generous. But, generosity towards others should never be seen as a fault. The Bankruptcy Code recognizes this and provides some room for filers to maintain regular charitable contributions.

The Bankruptcy petition anticipates the possibility of charitable contributions. The Statement of Financial Affairs, part 14, asks if the debtor, within the past two years has, "give(n) any gifts or contributions with a total value of more than $600 to any charity." Any such large contribution must be disclosed to the Court. Frankly, contributions this large are rare in the bankruptcy context, as most people facing financial difficulties are not able to make such contributions. However, even if a large contribution was made, it should be deemed acceptable unless the Court has reason to believe it was made to hide assets. So, it should always be disclosed to your attorney so he or she can determine if it will be an issue.

Schedule J of the Bankruptcy petition, which is a list of monthly expenses for the debtor, asks in part 14 for "charitable contributions and religious donations". This should be used to disclose regular, ongoing contributions, such as weekly contributions to a church. Even tithing, the practice of giving 10% of your income to your church, should be permissible. However, in that case, or with any larger charitable contributions, you should be prepared to show that these contributions have actually occurred (in reality, not just in your heart), and have occurred regularly in the past, not just in the weeks leading up to filing bankruptcy. Once again, contributions must be regular, and not seen as an attempt to hide assets that could be used to pay your creditor.

The Chapter 13 means test also asks about charitable contributions, and allows for charitable contributions to be deducted from "disposable monthly income". This disposable monthly income determines how much money must be paid to unsecure creditors such as credit cards and medical bills. You may deduct regular contributions made to "qualified religious or charitable entities or organizations."

So, payments made to pay your lazy cousin's rent does not count as charity. Payments , to your church, or an organization such as The United Way will qualify, once again, assuming they are regular. Payments made to political candidates or campaigns may not be deducted, an important distinction in an election year (given the state of the current election, it sure FEELS like charity).

A final point to make is that charitable contributions must be in the form or money. Contributions of clothes or goods cannot be made from your disposable monthly income. Keep clear records of your charitable contributions and be ready to present them to your attorney.

Ongoing, regular charitable contributions should not prevent you from filing for bankruptcy, and assuming they have been regular in the months leading up to filing, they could even reduce the amount you must pay. Contact us if you want to discuss your situation. There are certain limits to charitable contributions the Court may not allow, you should discuss yours with an experienced bankruptcy attorney.

Calculating Your "Income" For Bankruptcy Purposes

The definition of "income" is pretty straightforward in most contexts. It's generally somewhere along the lines of, "the money I make at work" or the money received from regular benefits such as Social Security or a pension. It seems simple enough.

However, things get a bit more confusing in the bankruptcy context, as they normally do. Income is important in bankruptcy because it determines whether you can file a Chapter 7 bankruptcy, or whether you must file a Chapter 13 bankruptcy (and if so, how much you must pay). The bankruptcy "means test" looks back at the six months before filing to determine your income during that period. So, you just need to look at your paystubs or benefit statements, right?

Nope... not that simple. "Income" as determined by the bankruptcy means test has a very broad definition. Yes, you will need to look at your traditional income, and your paystubs are a good start. But, "income" also includes one time payments, commissions, and bonuses. Income includes household contributions from friends or family members (something few people would think of as "income"). It includes lottery and gambling winnings. It also includes rent, dividends, interest, and royalties, or one time distributions. Most confusingly, it can include alimony or child support (which is normally not taxable), or even inheritances! The definition is so broad it occasionally precludes people in great need of debt relief from filing.

Another confusing aspect of this look back period is that the money is considered earned when it goes into your bank account, not when you actually do the work. So, if you perform a service in December, but are not paid the commission until the next April,  it would be considered "income" in the look back period from August (for which April is in the six month look-back period). The means test can be counter-intuitive, so it is very important your attorney explains it and carefully reviews all income. If in doubt as to whether something is income, tell your attorney!

There are a few exceptions to what is considered income that can work to your favor. Social Security payments are not considered income. Loans are also not income, and neither is your tax refund. But, once again, assume any money coming into your possession in the last six months to be income. An experienced bankruptcy attorney will not lead you astray.

So, what can be done if a one time bonus or windfall is included in your look back period, preventing you from filing Chapter 7 bankruptcy, or artificially distorting your Chapter 13 payment? Wait! No... I don't mean wait for my answer. I mean wait to file!

Proper bankruptcy planning is an important part of my job. Sometimes it is necessary to wait before filing. If you wait a few months, these distorting payments will no longer be part of your look-back period. It's just good planning.

On the other end of the spectrum, sometimes you need to hurry up! If you know that you will soon receive a large bonus at work, you will want to file before it becomes your "income". Remember, it's not when you do the work, it is when you receive the payment. You can use that distinction to your advantage.

Contact us if you want to discuss whether or not your income (or your "bankruptcy income") prevents you from filing. I'd be happy to walk you through this sometimes confusing world!

What is the Means Test "Look-back" Period

Any consumer bankruptcy filed in Western Pennsylvania will require the filer to complete and submit a "means test" on Form 22A-1 of the bankruptcy petition.

The means test helps determine if the debtor has enough money to repay his or her creditors, and if so, how much. Unfortunately, the means test is quite simplistic. This often leads to inappropriate results that show a filer as having income to repay creditors that does not exist. Your previous 6 months of earnings may not represent your future employment circumstances.

The means test income review has blind look-back period of 6 months. By "blind", I mean it looks back 6 months without any other context and includes any money earned during that period, whether or not the debtor is still making that money, or will continue to make that money. For instance, a one-time bonus or sales commission from 3 months ago will count towards the debtor's income calculation, showing an inflated income that does not exist.

How is the look-back period calculated? Form 22A-1 must include all income earned by the debtor for the 6 months preceding the bankruptcy filing. So, let's assume your bankruptcy is filed on July 15th, 2015. The first month preceding July is obviously June. You then count backwards from June... May, April, March, February, and January.

Therefore, a bankruptcy filed on July 15th, 2016 will consider all income earned from January 1st 2016 through the end of June 2016. This will be your means test "look-back" period. Income earned from July 1st to July 15th (in this example) will not be considered.

Obviously, planning your bankruptcy filing with this look-back period in mind is extremely important. As an experienced Pittsburgh bankruptcy attorney, I can help you consider these means test issues so you can most efficiently file your bankruptcy. It may be beneficial to wait to file. I'll advise patience when it bests suits you.

Conversely, if your income is expected to rise, filing bankruptcy as soon as possible may be advisable. We'll be ready to go if that is the case.

Contact us to set up a free consultation. And have your paystubs ready!

The Importance of Pay Stubs in Bankruptcy

When you hire a bankruptcy attorney (I would humbly recommend myself for your consideration) he or she will certainly ask to review your pay stubs, and will continue to do so throughout your case.

Why the obsession with pay stubs?

Exact income information is very important in bankruptcy for a number of reasons. First, pay stubs are used to complete your bankruptcy means test calculation. This is a 6 month look-back (from the month of filing) at all sources of income. The means test will often determine if you will be a Chapter 7 bankruptcy or a Chapter 13 bankruptcy repayment plan (higher income debtors are required to file a Chapter 13). These numbers cannot be estimated, hence the request for pay stubs.

Second, two months of pay stubs are required for a required filing known as "employee income records" or "pay advices". These allow the trustee assigned to your bankruptcy to review your recent income and verify it is consistent with your bankruptcy petition. 

Finally, pay stubs help your attorney to accurately report income in Schedule I of your bankruptcy petition. This is reviewed by the trustee along with the monthly expenses you report in Schedule J.

If you are in a Chapter 13 bankruptcy, it is not required that you keep and submit all pay stubs throughout the duration of the plan. However, it cannot hurt to keep them in case your attorney needs to file an amended plan. Keep your pay stubs in a Chapter 13 bankruptcy at least until you have attended the Meeting of Creditors.

If you are scheduled to consult with an attorney, make sure you gather up all pay stubs for you and your spouse, at least going back several pay periods. This will make it more likely the first consultation will provide useful advice and information. If you do not keep your pay stubs, consult your payroll or human resources department. If you are self-employed, you will need to bring an accurate accounting of your recent business income and expenses.

Pay stubs provide important proof of your income that is need to file and verify a bankruptcy petition. Make sure your bankruptcy attorney is provided with the updated pay stubs needed for your case.

Car Accidents and Bankruptcy, Part II

As discussed in my previous post, there are three major questions that must be answered when considering whether to include an auto accident lawsuit in a bankruptcy for potential discharge.

• Was the debtor under the influence of drugs and alcohol at the time of the accident?
• Was there bodily injury to the victim, or just property damage?
• Were the actions of the debtor willful or malicious (intentional)?

These three questions will determine if the lawsuit filed (most likely by the insurance company) will be discharged, or whether it will survive the bankruptcy.

The United States Bankruptcy Code addresses bankruptcy discharge under Title 11, Sections 523, 727, and 1328, and these are the sources for most of the information to follow.

Congress has embraced a policy that personal injury and death damages caused by a driver intoxicated or under the influence of drugs should not be eligible for a discharge in either a Chapter 7 or a Chapter 13 bankruptcy.

Section 523(a)(9) prevents the discharge of a debt related to, "death or personal injury caused by the debtor's operation of a motor vehicle, vessel, or aircraft if such operation was unlawful because the debtor was intoxicated from using alcohol, a drug, or another substance."

This section applies to both Chapter 7 and Chapter 13 bankruptcies. It is most important to note what this section does NOT apply to... property damage caused while under the influence of drugs and alcohol. If an individual causes only property damage while intoxicated, for instance by running into a parked car or destroying a fence, the purely property damage claim can be discharged in either a Chapter 7 or Chapter 13 bankruptcy.

If, on the other hand, the damage claim relates to a bodily injury or death, the claim cannot be discharged, even if it was not willful or malicious. The claim and the debt will survive or "pass-through" the bankruptcy. It will be important to review the details of the lawsuit with your bankruptcy attorney to determine how section 523 will apply to your bankruptcy petition. It is entirely possible that filing a bankruptcy will remain worthwhile, if the debtor has large amounts of other debt. Filing a bankruptcy on the remaining debt may make it possible to pay damages related to an accident.

Congress has taken a hard stand against discharging debts related to driving under the influence when someone has been injured. As an experienced Pittsburgh bankruptcy attorney, I can help you determine if you are eligible for a discharge of an accident related debt.

In my next post, I will write about damages related to willful or malicious conduct of the debtor, and the (sometime) differing results in Chapter 7 and Chapter 13 bankruptcy. Willful and malicious acts will prove to be the most difficult to discharge.