What the Means Test Means To You

In 2005 Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which instituted sweeping changes to the United States Bankruptcy Code. Among the many changes to the code was the imposition of a "Means Test" for all consumer bankruptcy cases. The Means Test determines which individuals may seek relief from their creditors under Chapter 7 and which must utilize Chapter 13. On Monday, the IRS issued updated median income figures for each state, which are used in the Means Test, so this seems like as good a time as any to discuss the Means Test, and what it means to you.

In its simplest form, the Means Test takes the Median Income compares the median income for a family of the same size as yours in your state with your family income. If your family income is below the median income for your state then you are eligible to file for relief under Chapter 7; if your family income is above the median, then you are not eligible for Chapter 7 and will likely have to consider filing for Chapter 13.

In theory, individuals with enough income will be pushed out of Chapter 7, and into Chapter 13 where they will be forced to make payments on a portion of their unsecured debt for a period of between three and five years. The public policy rationale is that if an individual can make certain payments toward their debt, they should at least pay something. In many cases, people making just over the median income (based on double the actual gross income for the past 6 months) are forced into a lengthy and expensive Chapter 13 case, where these families who are already struggling will have to make monthly payments to a Chapter 13 trustee for as much as 60 months, while those making only slightly less can reach a discharge in as few as 4 months, with no payments to a trustee in a Chapter 7 case.

In Massachusetts, where I practice, the median income for a person living alone (as of the date of this entry) is $53,315.00, $69,204.00 for a family of two, $82,297.00 for a family of three, etc.. (You can find more information about the median income in your state here: http://www.justice.gov/ust/eo/bapcpa/20100315/bci_data/median_income_table.htm) While these numbers may seem high to some readers, the median income in Massachusetts has been trending down for the past year, as a result of the down economy.

The median income is not a static number, but the comparison is not. There are "deductions" from your income for certain allowed living expenses (health care, automobile maintenance, payments to secured creditors) which will turn the basic calculation on its ear.

A qualified bankruptcy attorney can, after some number crunching, tell you whether you "pass" the means test and are then eligible for a Chapter 7 case, or if you must consider Chapter 13. More importantly, your bankruptcy attorney can help you determine if a Chapter 13 case might be more beneficial to you regardless of how "score" on the means test. If you have questions about the means test please call the Law Offices of James Wingfield at 508-797-0200, or visit our website at www.wingfieldlaw.com.

The Role of Chapter 7 Trustees

Many of my clients are confused, at best, when it comes to the role of trustees in bankruptcy. Many are vaguely aware that such a thing exists, but most do not fully understand who a trustee is, what the trustee's role is, and what powers the trustee actually has. In this post I will give much of the same explanation that I give to my new clients. [Editor's Note: No Chapter 7 Trustees (or former colleagues) were harmed in the writing of this blawg post.]

Trustees in bankruptcy come in a variety of forms. The United States Trustee oversees and officially administers all bankruptcy cases nationwide. In Chapter 7 (liquidation) cases, a private individual is appointed to administer the assets. Chapter 7 trustees are appointed from a panel of trustees who are themselves usually attorneys or accountants. In Massachusetts, where I practice, all of the Chapter 7 panel trustees are bankruptcy attorneys.

Chapter 7 is available to both businesses (such as corporations, limited liability companies, limited partnerships, etc.) and natural people (i.e., individuals). When a company files for bankruptcy under Chapter 7, the company is typically shut down immediately and all of its assets are liquidated (turned into cash) by the appointed Chapter 7 trustee, and the cash is then distributed to the company's creditors on a pro rata basis, pursuant to certain priorities established by the bankruptcy code.

In theory the same thing happens when individuals file a petition for relief their creditors under Chapter 7. However, in the case of individuals many assets are protected by virtue of the many exemptions available to individuals under either state or federal law.

In either a corporate Chapter 7 or an individual Chapter 7 case, the debtor or (in the case of a corporation) its representative attends a "meeting of creditors" pursuant to Bankruptcy Code s. 341(a). All creditors are invited to attend the meeting of creditors and the appointed trustee questions the debtor about her assets, debts, income and expenses.

In the vast majority of individual Chapter 7 cases, the appointed trustee will find that there are no non-exempt assets available to the bankruptcy estate, and will determine the debtor's case to be a "no asset" case. In these instances, the Chapter 7 trustee files a Trustee's No Distribution Report (or NDR) with the Court and the case is basically over for the debtor.

However, in cases in which the trustee determines that there are assets -- including some things, such as litigation that the average person may not consider to be assets -- the trustee will begin the work of obtaining and liquidating assets.

When you are considering seeking bankruptcy relief it is crucial to have the advice and assistance of a qualified bankruptcy attorney to help you to maximize your exemptions and protect your property exempt assets from the reach of the trustee. If you are considering bankruptcy call the Law Offices of James Wingfield at 508-797-0200, we can help.

Famous Bankruptcy Filers

Very often my new clients tell me, or otherwise let me know, that they are ashamed that they are even thinking of filing bankruptcy. Amazingly, many of those clients have those feelings reinforced by comments from their creditors and collectors -- even though many of those creditors have themselves sought bailout funds from the Federal Government or have filed their own bankruptcy cases! I usually tell them that the very purpose of the bankruptcy code is to encourage individuals and businesses to take risks in order to (looking at the big picture) grow the economy. I then usually explain that everyone in this country plays by the same rules and that the bankruptcy code is part of those rules. I then usually point out that virtually all of their creditors have taken into consideration the potential of bankruptcy when they approved their credit and when they determined their interest rates -- the very interest rates that are often pushing them to the verge of a bankruptcy filing. All too often this does not help to ease their feelings that they are somehow being immoral by taking advantage of a set of federal laws that large businesses use all the time. What does seem to help to ease their discomfort is when I start to tell them about the many historical figures and currently famous people who have filed for bankruptcy and not only survived, but faced no long term community shame (and in most cases more than recovered financially). So, for my faithful readers I am including here a partial list of famous people who have filed for bankruptcy. Some of these may surprise you.

Abraham Lincoln (when he was a poor country lawyer, before he even started in politics)
John Barrymore (and he continued to perform as one of America's greatest actors)
Lenny Bruce
Toni Braxton
Buffalo Bill
Samuel L. Clemens (yes, Mark Twain)
Francis Ford Coppola (and while we are on the subject of famous filmakers)
Dino de Laurentis
Walt Disney (before he ever put three circles together to draw Mickey Mouse)
Henry Ford
Redd Foxx
Ulysses S. Grant (the 18th President and face of the $50 bill)
Richard Harris
H.J. Heinz (no, he did not file Ch. 57)
Milton Hershey (of Hershey Chocolate fame)
Charles Goodyear (the tire man)
Larry King
Cyndi Lauper
Jerry Lewis (not to be confused with...)
Jerry Lee Lewis
Joe Lewis
George McGovern (the Senator from South Dakota and also ran in the 1972 presidential race)
William McKinley (25th President)
Willie Nelson
Thomas Paine (author of Common Sense and founding father of the United States)
Randy Quaid
Burt Reynolds
Donald Trump (not only no shame, but recovered well enough to fire people every week on TV)
Johnny Unitas

This list is by no means a complete list. In fact, while bankruptcy filings are public record, unless you have a business relationship with someone and specifically if someone personally owes you money, the only way you would know that person ever filed for bankruptcy is if that person told you or if you were to go specifically searching for that person in the bankruptcy dockets.

If you are facing financial pressure from creditors, don't let a bill collector or anyone else convince you that seeking help is immoral, wrong or shameful. Call the Law Offices of James Wingfield at 508-797-0200 or visit us on the Web at www.wingfieldlaw.com. We have the experience and we can help.