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A few years ago, the US Supreme Court decided a case called United Student Aid Funds, Inc. v. Espinosa. The decision held that even when a Chapter 13 plan violates the Bankruptcy Code, the creditor must object within a set time or else they won’t get to object later, when the bankruptcy is done. Apparently creditors still haven’t learned.
In a recent decision by Judge Kelley in the Eastern District of Wisconsin, the Court held that the creditor, American Family Mutual Insurance Company, was too late when it moved to reopen a long completed Chapter 13 to challenge an improper plan. Even though the case was completed before the Espinosa decision, the principle still applied.
Creditors who receive a Chapter 13 plan should ALWAYS review them. That is free advice from counsel for Chapter 13 debtors.
I like to offer free initial consultations because I believe it’s only fair to know what your options are before paying for legal representation. I meet with many people who would benefit from Chapter 7 Bankruptcy relief. The only problem is that they are not eligible to file and get a discharge because they filed in late 2005, or 2006, or later.
The rules are very clear and simple: Measured from the date the prior bankruptcy was filed (not converted), a debtor must wait 8 years before filing another Chapter 7 bankruptcy and receiving a discharge.
Sure, there are other options available in the meantime – debt consolidation programs, Chapter 13 Bankrupty plans, Chapter 128.21 Debt Amortizations (for Wisconsin residents). These all require a steady income with disposable money to pay creditors. In this economy, not everyone has that.
My two cents: Meet with me (or another well-trained bankruptcy attorney) and look over your finances. If you make so little money you can’t be garnished, you may simply want to wait to file. If a small Chapter 13 plan payment is possible, that might work as well, but you should never file a Chapter 13 plan unless you know in good faith you can make it work. It’s simply too much time for you, an attorney, the court and trustee, not to mention money and a toll on the system. Also, you should never try to file a Chapter 13 bankruptcy and plan without an attorney – I was in court recently when a judge told a pro se debtor that she wouldn’t even file a bankruptcy without an attorney!
Still, there may be options available. Call us or e-mail us to discuss.
Lawyers, especially bankruptcy lawyers, are very aware of what is happening with the economy and how the average joe lives. We are much more in tune with the middle and lower classes than our wealthier congressmen. So when we hear questions like “Why are does it cost so much to file a bankruptcy?”, we understand and sympathize. We even get that some people who would like to file cannot afford to do so. This affects not only our clients in Wisconsin and Illinois, but consumers all across the country.
The price of filing a bankruptcy is set by Federal law. Right now, to file a Chapter 7 bankruptcy it costs $306, while a Chapter 13 bankruptcy runs $281. These fees go to pay the administrative fees of filing the case (things like the Trustee’s fees and the cost of processing paper work). While it is possible to petition the court to waive your fee for extreme financial difficulties, it is not easy to get a waiver. It can’t be. The courts depend on your payments in order to staff the courts, pay the judges, trustees, and other officials involved, and run everything smoothly. The courts receive woefully little funding and rely on these fees to make the system work well.
The second part of the price to file a bankruptcy comes from attorney’s fees. Your attorney does a lot of work for you when filing your bankruptcy petition. Some of the tasks in a simple bankruptcy include: preparing the petition, contacting creditors that are garnishing or may garnish your wages, attending the 341 meeting, answering questions you have, protecting assets from seizure, and preparing a means test. The means test, which first showed up in 2005, is a big reason why the cost of filing a bankruptcy has shot up in recent years. As you can see in other posts, the means test helps determine whether or not you can file a Chapter 7 bankruptcy. Before the means test requirement, people could file so long as they were not filing in “bad faith.” Now, with the means test requirement, attorneys have to perform a tricky mathematical test which measures whether or not our clients are deemed worthy of a Chapter 7 bankruptcy, based on income and expenses. What complicates the means test further is that there are now exceptions attorneys have to account for. To put it simply, the amount of work that goes into a bankruptcy is what makes the cost so high.
Even though there are high costs for filing a bankruptcy, we here at Lakelaw try and work with you to make bankruptcy affordable. If you have financial concerns but aren’t sure if bankruptcy is right for you, contact us for a free consultation in order to discuss your financial options. We promise to treat you with Care, Kindness, Courtesy, Respect, Professionalism and Dedication.
This article was co-authored by Lakelaw Senior Associate Ryan Blay and Associate Nicholas D. Strom
When we meet prospective clients for the first time, we try to make them feel welcome as guests of the firm. After all, a lawyer-client relationship is built on trust and comfort. The first meeting, which we offer free of charge, is meant to help our clients evaluate us and for us to evaluate the nature of our clients’ cases and what we can do to help.
Like most firms, we usually ask questions at the initial meeting. Other firms have lengthy questionnaires, whereas we prefer to ask direct questions to find out what we need to know. Some of these questions probably seem strange, especially since most folks come in with minimal money and assets and hefty debts. So why do we ask these questions?
Well, first off, bankruptcy is a complicated process. Try reading the 2005 “reform” of the bankruptcy laws passed by Congress. If you understood that, you’d be the first to do so. The point is that the bankruptcy laws don’t always mesh with common sense. When people do sensible things to avoid bankruptcy like sell off assets, borrow from relatives and pay them back or settle debts, it can cause problems in bankruptcy. So we need to know this before we prepare paperwork so that we’re not surprised and our clients aren’t either when the courts and trustees ask these questions.
They are routine questions to us, we’ve heard them hundreds of times. “Has anyone died leaving you money? Did you pay a relative a large sum of money for a loan or debt in the last year? Did you sell any big asset like a car or house for less than full value in the last 2 years? Did you pay any one of your creditors over $1000 in the last 3 months? Did you use a credit card or take out a loan in the last 90 days?”
As experienced attorneys, we know what the most common questions are going to be as we help people through the bankruptcy process. We’re not trying to judge or trick you, but trying to identify these issues and explain them. Sometimes that means waiting for a few weeks or months to file. Other times it means nothing is wrong and we can move ahead as we planned. Having experienced attorneys who know what questions to ask mean less “surprises”, and nobody likes those in the courtroom or bankruptcy hearings.
Many people come in to our office fearing the dreaded means test. They want to file bankruptcy but are worried that this means test will not let them file a Chapter 7 bankruptcy, or that they will have to pay a ridiculously high Chapter 13 plan payment. They worry that if they do not pass the means test they cannot file a bankruptcy. This is simply not the case. This article hopes to give a basic understanding of what the means test is and clear up some of the misconceptions about the use of the means test in bankruptcy.
There are two main types of bankruptcy for most folks – Chapter 7 and Chapter 13. Chapter 7 is a chance to shed debt and move forward debt free, while a Chapter 13 is a repayment plan ranging from 3 to 5 years with debt forgiven after the plan completes. The purpose of the means test is to push filers away from a Chapter 7 when they can afford to make payments in a Chapter 13.
The first way to pass the means test is to be what is known as a “below median debtor.” While this sounds complicated, it is a very clear standard. To be below median you have to earn less than the median income for your state and household size for the previous six months. The median income levels, which can be found here is the 50% line for gross income in your home state for each household size. For instance, if you are a single individual in Illinois, and you make less than $45,545 per year based on those last 6 months of income, you are considered “below median”. But even if you do not qualify for below median status you still may pass the means test and be able to file a Chapter 7 bankruptcy.
The next step in the means test is to take account of your expenses. The expenses which can be taken are based off IRS standards, with a few exceptions for bankruptcy specific deductions. The expenses must be reasonable and the best thing to do is speak with an attorney about any deductions you might be entitled to. The deductions take into account car and mortgage payments, child care, child support, union dues, taxes, and many other expenses. Even if you do not pass this step you will still likely be able to file a bankruptcy, but it will have to be a Chapter 13. The outcome of the means test will determine what your unsecured creditors (loans, credit cards, utilities, medical bills, and so forth) must be paid back over the plan, so it can influence what your plan payment will be.
Hopefully, this article cleared up some of the basic misconceptions about the means test. The means test does not prevent filing a bankruptcy, but helps determine what type of bankruptcy a person can file – and, for some people, how much must be paid back through bankruptcy. As you can see, bankruptcy isn’t a simple question of “how much can I give” anymore. That is why a meeting with a licensed attorney who concentrates in bankruptcy filings can give you a clearer answer of your financial options. If you have further questions about the means test, bankruptcy or financial distress in general please contact the professionals at Lakelaw. Our team focuses on representing clients who face financial difficulty while treating our clients with Care, Kindness, Courtesy, Respect, Professionalism and Dedication.
This article was drafted by Lakelaw Associate Nicholas D. Strom
Most people who file bankruptcy want to file a chapter 7. This eliminates most debts right away. Some people aren’t eligible for chapter 7. Most of these people end up having to pay their creditors for up to 5 years in a chapter 13 case. How come?
Back in 2005, Congress decided that people who could pay something to their creditors had to do so to get relief in bankruptcy. In fact, Congress decided that people who made more than the median income were presumed to be abusing the system if they tried to file a chapter 7 case to eliminate their debts.
So they devised a complicated means test. If the prospective debtor “passed the means test” then that meant that the debtor no longer is “presumed to be abusing the system” by filing a chapter 7 case.
But that doesn’t mean that our prospective debtor is home free.
Every debtor has to prepare a budget of income and expenses and file it as part of their bankruptcy case. And if that budget of income and expenses shows that the debtor has, or even may be expected to have, significant disposable income, the United States Trustee might try to prove that the debtor is nevertheless abusing the system, even if the debtor “overcomes the presumption of abuse” by “passing the means test.” If under the “totality of circumstances” the court determines that the debtor’s chapter 7 case is abusive, the court could still dismiss a debtor’s chapter 7 case for abuse.
Oddly enough, this entire analysis only applies for a debtor whose debts are primarily consumer debts – or debts incurred for personal purposes. A debtor with predominantly non-consumer debts isn’t even subject to the means test at all.
Who says bankruptcy is easy? For more information about consumer debts as opposed to non-consumer debts in bankruptcy, click here.
For careful and thoughtful analysis of your case, call on Lakelaw – serving debtors in Illinois and Wisconsin – at 1 866 LAKELAW (525-5329).
At Lakelaw, we ask all our clients to give us paystubs from their jobs for the six months prior to the date that they are filing their bankruptcy case. It’s a pain in the neck. We know. Why do we ask? Congress requires us to ask.
Under the “means test” you are considered to be abusing the bankruptcy system by filing a chapter 7 case – a straight bankruptcy – if your “current monthly income” is more than the national median. What does that mean in plain English?
If you make more than 1/2 of the people in the country for a family your size, Congress thinks you should be filing a chapter 13 case, all things considered.
Just to be sure you are not noodling your numbers, Congress figures out what you are making now by averaging what you made over the past six months. So even though the past six months does not reflect your present income, it does define your “current monthly income” for means test purposes.
If you make more than the median income for a family our size, we can sometimes qualify you for chapter 7 if you “overcome the presumptions” of abuse. For this, we need to do a detailed means test analysis. We charge you extra for this. It takes us an hour or two to analyze your situation and decide the proper outcome for you. We’ll explain more about this in a future post.
If you are buying something on credit, like a car or a house, this is called a secured debt. In bankruptcy, you need to make choices about your secured debt. There are three options and maybe a fourth one too. These are called:
- Reaffirm or reaffirmation
- Redeem or redemption
- “Pay and Retain” or “Ride-Through” – the 2005 bankruptcy law tried to abolish this but was not completely successful
Here’s a brief explanation of each one:
Reaffirmation: In this instance, you, the debtor, agree to continue to pay the debt to the secured creditor, like GMAC or Ford Motor Credit. In exchange, you keep your car and keep paying your monthly payments just as you did in the past. Sometimes, your bankruptcy lawyer can help you negotiate a better deal with the lender in order to persuade you to reaffirm the debt. Maybe the lender will agree to do this because it is better off with you paying than it is for the lender to sell the car at a loss at auction. If you don’t reaffirm a debt secured by a vehicle, you run the risk of having the car repossessed or taken away from you outside of bankruptcy. This will almost certainly happen in Illinois and is likely to happen in Wisconsin too. Laws do vary in other states.
If you decide to reaffirm, your lawyer needs to certify that you can afford to do so. That’s why we charge a little extra for each reaffirmation agreement – we need to be sure we can give this certification taking into account your economic situation after bankruptcy. Otherwise, you’d have to go to court to explain to the judge why you can still afford this secured debt.
Surrender: Here, you decide that you can’t afford to keep a property securing the debt. Maybe your car is too expensive, or not worth much compared to the loan. Maybe it would pay you to give up the car and try to get another less expensive vehicle rather than keep paying on it. In this case, you’d give up the car and be discharged from debt on the balance. Surrender is often the right choice when you are deeply underwater or “upside-down” on your the mortgages on your house.
Redemption: This is sometimes a good choice when you have a late model car which has substantially declined in value compared to the loan, especially when you have a high interest rate. If you have the money, maybe from an IRA or even better, from a new loan, you can pay off the loan on your car for the present value of the car. For example, if your car is worth $15,000 and the loan is $30,000, you can get a new loan for $15,000 and discharge the remaining $15,000 in your bankruptcy case. This could result in a much lower payment for the balance of your loan. Ask us about redemption. We know how to do this – there’s an additional fee but in many cases, it’s worth it.
“Pay and Retain” or “Ride-Through” You can’t do this any more for personal property. However, we have found that you don’t have to reaffirm a debt secured by your house in order to keep paying it as normal. This is a good option since you maintain your mortgage as normal, but no longer have personal liability in the event that you default in the future. Ask us about this too.
Statement of Intention: One of the papers you’ll sign in your bankruptcy case is a “Statement of Intention”. On this paper, you’ll tell your creditors whether you want to keep your property and keep paying on it, surrender the property and be discharged from the debt or redeem the property by paying the current balance. Look this paper over carefully and make sure it’s correct
Some retail stores claim a security interest or lien in items like jewelry or computers. If you have this situation, let us know. We have some ideas which can help you.
Act on your intentions – Remember, you have to act on your intentions promptly, so when we send you a reaffirmation agreement, read it, make sure you agree with the terms, sign it and return it right away. And call us if you have any questions about any aspect of a reaffirmation agreement.
What is projected monthly income? And why do we care? It tells us your monthly payment in a chapter 13 case.
If you are a debtor in a chapter 13 case, you need to know the amount of your projected monthly income because that is the amount of money you have to pay to the chapter 13 trustee during your applicable commitment period.
What’s an applicable commitment period? That’s the time a debtor must remain in chapter 13 case – 3 years for someone who made less than the median income for the six months before banrkuptcy and 5 years for everyone else.
But what is projected monthly income? We really don’t know because this term is not defined in the Bankruptcy Code. We know that current monthly income is the average income you made from all sources during the six months prior to your bankruptcy case. But we don’t know whether what you made before is what you are likely to earn in the future. Nor do we know whether your present budget is going to be the same in the future. You may have a new job. Or you may be threatened with layoff or furlough. And your expenses might change. So current monthly income isn’t necessarily the same as projected monthly income.
We have 11 different judges in Illinois and another 6 judges in Wisconsin. There is no uniformity yet among these judges. So when we know the judge who will oversee your case, we will know how to calculate your responsibilities under a chapter 13 plan.
And soon, we hope that the Seventh Circuit Court of Appeals, which oversees all federal courts in Illinois, Indiana and Wisconsin, will give us some clarity on how to deal with these issues in a case called In re Johnson.
So keep up with Lakeblawg and we’ll keep up on the latest developments in chapter 13 cases for you.
You must take a credit counseling course before you file a bankruptcy case. This is sometimes called the “ticket in” to bankruptcy. Bankruptcy attorneys are supposed to check to be sure that you’ve done this before you file your case. So this is not much of a problem any more.
However, you must also take a “personal financial management instructional course” – I call it a financial management course myself – before your case closes in order to get a discharge. This is sometimes called the “ticket out” of bankruptcy. We spend a lot of time telling our clients to do this. We remind clients to take the financial management course when we file their case. We write emails and letters to them asking them to take financial management training. We tell our clients to take the financial management instructional course in our engagement letters. Surprisingly, some clients still don’t do this.
Bad idea. Their case is then closed without a discharge. The client contacts us. We have to move to reopen the case. That costs $250 just for the filing fee. We have to charge our client an attorneys’ fee for this additional work. We don’t like having to do that and we know that the client doesn’t like that either.
So, take the course. Personal Financial Management Instructional Courses are actually a bargain. You spend just a few dollars on this course and you may get some ideas which will really help you in your financial affairs in the future. This may actually be the one aspect of the “Bankruptcy Abuse Prevention Consumer Protection Act” which actually was a good idea.
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