"Income" in Bankruptcy

The definition of income seems simple enough. How much money do you make? But, like most things in bankruptcy law, it is a bit more confusing than that.

First of all, there are two ways of looking at income, gross income and net income. Gross income is the money you earn before taxes, and net income is your earnings after they are removed. Both are important in bankruptcy. Your gross income will be considered in the “means test” (which is discussed in greater detail elsewhere on this blog and website) while your net income will be used in Schedules I & J in the bankruptcy petition.

While gross and net income will generally be proportional in most cases, sometimes they can differ between filers. For instance, net income can be lower if your tax withholdings are particularly high, or if you have large deductions for insurance or retirement accounts. Either way, your bankruptcy attorney will need to discuss both types of income with you in order to determine your eligibility to file bankruptcy.

The definition of income can also be confusing in bankruptcy because the court will consider certain payments to be “income” that go beyond your paycheck. For instance, any type of government benefits will be considered income. This includes Social Security, unemployment compensation, VA benefits, and even food stamps. Adding further confusion, Social Security is considered income for purposes of Schedules I & J of the bankruptcy petition, but NOT for the means test!

The court will also consider other indirect payments as “income”. This includes household contributions towards expenses, side jobs, and even one-time windfalls like lottery winnings! A contribution towards expenses from a roommate is not the traditional ideal of “income”, but in bankruptcy, it is.

This can all be very overwhelming for an individual trying to determine on their own if they qualify. But, I would be happy to discuss your situation and help you determine your bankruptcy “income”. The primary purpose of this blog is let you know you should disclose ANY type of income you may have to your bankruptcy attorney, even if your don’t think of it as “income” per se. As an experienced bankruptcy attorney, I will be happy to walk you through this confusing subject in a free phone consultation. Call me at 412-414-9366.

Protecting Your Tax Refund

Tax season is once again upon us, as we begin to receive our W2s and 1099s. Just like frigid Pittsburgh weather, we can complain… but it won’t do any good!

For many of my clients, tax refunds are an important part of meeting their monthly obligations. Tax refunds are often used to catch up mortgages, do household repairs, or buy necessities. For many Americans, tax refunds are a form of forced “savings”. Losing a tax refund could be catastrophic.

Individuals looking to file bankruptcy are therefore usually concerned about losing their refund. Luckily, bankruptcy law allows for “exemptions” which can be used to protect your property and assets from your creditors. These exemptions are not unlimited, so it is important to discuss them with your bankruptcy attorney, and to list all of your property when meeting with him or her.

There is not an exemption dedicated solely to tax refunds. However, the Federal exemptions under bankruptcy law do provide a “wildcard” exemption. Depending on how equity you have in a home (if you have one) the value of this wildcard exemption could be anywhere from zero up to nearly $10,000 for an individual.

An experienced bankruptcy attorney can make sure these exemptions are maximized. If you are looking to file bankruptcy soon, and expect to get a significant tax refund this year, you should file your taxes as early as possible so that the amount can be determined and exempted. As long as it can be exempted, you can file your bankruptcy without concern of losing it. If it goes beyond the value of your exemptions, you will need to discuss the situation further with your bankruptcy attorney.

Also, it should be noted there are things you can do with your refund that are strongly frowned upon or forbidden by the bankruptcy court. Paying back friends or family with a “preferential payment” would be one. Making a large frivolous purchase may be another. Talk with your bankruptcy before spending any of it if you have any doubts.

If you are concerned about your pending tax refund, and are considering filing Chapter 7 bankruptcy (or Chapter 13 bankruptcy), can me at 412-414-9366. Or email me and set up an appointment. With my experience, I will make sure you keep all of your refund, or as much as possible. Tax season doesn’t need to be ALL bad.

Stimulus Payments and Bankruptcy

It appears that increased stimulus payments will soon become a reality. Qualifying Americans are already set to receive $600.00 per person. While nothing is certain, and negotiations are ongoing, up to another $1,400.00 per person may be authorized.

Individuals preparing to file bankruptcy learn that they must disclose all of their property and all of their income. This is a fundamental requirement in bankruptcy. So, the question that is being raised by many of my clients is… do I get to keep my stimulus payments?

Yes!

Stimulus payments do not count towards you “means test” income that determines whether you will qualify for Chapter 7 bankruptcy. Also, the money you receive can be exempted from your creditors. So, you are not going to lose it, and it is not going to prevent you from filing.

It should be noted, however, that you must be careful about what you do with this money once you receive it. Using it to make a preferential payment to friends or family members could be problematic. It would also be best not to use it towards a frivolous purchase which may not be exemptable.

Paying attorney fees, or getting caught up on a car or mortgage payment, is completely acceptable.

If in doubt as to what you can (and can’t ) do with your stimulus check(s), call your bankruptcy attorney, or give us a call.

Your stimulus payments, like bankruptcy, are meant to help you. Use them both to your advantage during these difficult times.

Why Don't Creditors Appear at the "Meeting of Creditors"?

Bankruptcy law requires a "meeting of creditors" which is usually held 4-to-6 weeks after the case is filed. Clients often worry about this meeting, fearing that it will be in a courtroom with judges and attorneys, and that they will be attacked and belittled by their creditors. This couldn't be further from the truth. In fact the creditors rarely if ever show up.

The purpose of the meeting of creditors is to allow the bankruptcy filer to be questioned about their debts, income, and assets. A Trustee is assigned to your case to review your filing and ask you relevant questions. This Trustee is an attorney, and they basically sit in the place of your creditors. The meeting is held in an office, not a courtroom. There are no judges present. While the meeting of creditors will require you to testify under oath, it is rarely an adversarial proceeding. There is no harsh "cross-examination." It is primarily held for informational purposes to review what your attorney has filed.

So, why don't the creditors show up? Because the Trustee sits in their place to review their interests and determine if any money or assets are available for the creditors. With hundreds of thousands of cases filed each year, even major credit providers would not be able or willing to hire individual attorneys, at $200+ per hour, to attend these meetings. This is especially true with the Trustee taking their place. If the Trustee believes there are assets to pay the creditors, he or she will be responsible for going after it and dispersing the funds. It would not be cost effective for each creditor to do this on their own. It's is very rare when they do. In short, creditors do not show up because it is not worth their time and money.

Creditors do sometimes appear, nonetheless. These are almost always "unsophisticated" creditors. This simply means creditors who do not know the bankruptcy process. This may include landlords or individuals (non-corporations) who the debtor owes money to. Even if they do show up, they will be limited to asking questions related to the bankruptcy position. Many who show up only do so because they received notice saying they should show up. It will rarely be a problem for the case going forward.

Contact us if you have any questions about the bankruptcy process. I will be happy to set up a free consultation to discuss your situation.

Updated Median Income Standards for November 1, 2020

Effective November 1, 2020, the table used to determine the “means test” in Chapter 7 and Chapter 13 bankruptcy has been updated for the Western District of Pennsylvania.

The amount you can earn without repaying unsecured creditors is determined by 1) your household size, and 2) your household income. This information is used to calculate the “means test”, which is an objective standard of whether you are required to repay.

Your household size will, with only a few exceptions, include you, your spouse, and any children you claim on your taxes. Your spouse will be included for calculation purposes even if they have no intention of filing bankruptcy. They will not be included if you are legally separated and living in separate households. Children will be included as long as they are still claimed on your federal income taxes. Non-claimed children will not be included for purposed of household size.

Household income is broadly calculated to include almost anything besides benefits derived from the Social Security Act. This includes unemployment, bonuses, self-employment, or even alimony and child support. The look-back period is the six months before filing bankruptcy.

It is important to point out that it will NOT include income received as part of the CARES stimulus act. It will include any income received from state unemployment, however.

One last important thing to remember is that income is determined by GROSS, before tax, income. Here is the updated chart for gross income in the six months before filing, as of April 1, 2020 (amount listed below is combined income for all household members, averaged per month):

• Household of one: $4,767.75 per month

• Household of two: $5,881.42 per month (including all earners)

• Household of three: $7,268.08 per month (including all earners)

• Household of four: $8,654.75 per month (including all earners)

• Household of five: $9,404.75 per month (including all earners)

• Household of six: $10,154.75 per month (including all earners)

• Household of seven: $10,904.75 per month (including all earners)

Contact us for a more detailed analysis of your income. If you are able to forward me proof of income, I can determined whether or not you will be required to pay unsecured creditors in bankruptcy.

If your income is disrupted by the COVID-19 epidemic, now may be the best time to file.