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.

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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
• Surrender
• 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.

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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.

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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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