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In bankruptcy, spousal income is important. But only some of it.
The part of the bankruptcy process that scares my clients most has nothing to do with them.
It’s got to do with their husband or wife, someone who may not even be filing for bankruptcy.
The fear sets in when I tell my client that I need their spouse’s income information in order to complete the bankruptcy documents.
Then I explain the bankruptcy hokey pokey.
Why Your Spouse’s Income Is Required
The means test requires your spouse’s income if you’re legally married and living together.
The goal is to get a better sense of your overall household income.
In addition, the deductions from the means test that follow the income section are higher for larger households. If you’re getting the benefit of a deduction, you need to have the burden of the extra disclosure.
Once We Add, We Subtract
The means test contains a place for what’s called a marital adjustment.
If your husband or wife is using part of their income to cover their separate expenses then we get to back out that amount from the means test.
Just like the hokey pokey, which you probably played as a kid. You put your left foot in, you put your left foot out …
Some examples of separate expenses that can be backed out under the marital adjustment are:
money your spouse pays for his or her tax liability;
funds use by your spouse to support people other than you or your dependents;
expenses for payment of your spouse’s separate debts; and
just about any money not being used for household expenses.
The Spouse Who Won’t Play the Game
From time to time I’ll have a client with a spouse who won’t give up their income information.
Maybe they’re very private. Perhaps they just don’t want to be bothered. It doesn’t matter.
This creates a bit of difficulty, but we can often get past it.
After all, letting your spouse stand in the way of your bankruptcy isn’t the goal of the process – it’s full disclosure and painting a fuller picture of your financial situation.
How To File Bankruptcy: Marital Adjustment In Means Testing was originally published on Consumer Help Central. If you're seeing this message on another site, it has been stolen and is being used without permission. That's illegal, a violation of copyright, and just plain awful.
Once you figure out current monthly income for your means test, you need to match it up to see where you stand.
You’ve completed the first part of the onerous means test for your bankruptcy case.
You’ve totalled up your income over the past six months and are now at a crossroads.
Do you need to keep going with the means test, or are you done?
It all depends on whether your income falls above or below the applicable family median income.
Why Applicable Family Median Income Is Important
If your household current monthly income falls below the applicable family median income for a household of your size then you automatically pass the means test. You can file for Chapter 7 or, if you have reason to do so and otherwise qualify, Chapter 13 bankruptcy. If you choose to file for Chapter 13 bankruptcy, your repayment period will be 36 months long.
If, on the other hand, your household current monthly income falls above the applicable family median income for a household of your size then you need to keep going with the means test to see if you qualify for Chapter 7 bankruptcy. If you choose to file for Chapter 13 bankruptcy, your repayment period will be 60 months long.
What Is Your Applicable Median Family Income?
The applicable median family income varies state-by-state, and is calculated by the Office of the United States Trustee.
You can check out the applicable median family income for California here.
You can check out the applicable median family income for New York here.
How To Determine Your Household Size
The term “household” is not defined by the U.S. Bankruptcy Code, so we are left with a variety of ways to calculate household size. Three approaches to determining the size of a household have developed:
(i) the “heads on beds” approach, which relies on the Census Bureau definition and includes all persons occupying a housing unit, both related and not related;
(ii) the “IRS dependency” approach, limiting household size to individuals a debtor can claim as a dependent on its tax return, and
(iii) the “economic unit” approach, which includes individuals living with the debtor and acting as an economic unit, in that either they are financially dependent on the debtor, they financially support a debtor, or their income or expenses are inter-mingled or interdependent with those of a debtor.
In New York, the U.S. Bankruptcy Court for the Southern District of New York in the case of In re Fraleigh, 474 BR 96 (Bankr. Court, SDNY 2012) that the “economic unit” approach was properly used. However, other cases have stated that the decision on household size is done on a case-by-case basis.
In California, the U.S. Bankruptcy Court for the Eastern District of California in the case of In re Crow, Case No. 11-19074-B-13 (Bankr. Court, EDCA 2012) followed the same “economic unit” approach. Once again, however, other cases have stated that the decision on household size is calculated using one of the other methods.
Choose Wisely, Come Battle-Ready
There are three ways to calculate household size, courts are sharply divided even after years of wrangling with the issue, and the success of your bankruptcy case depends on getting it right.
Don’t take chances.
How To File Bankruptcy: Applicable Median Family Income was originally published on Consumer Help Central. If you're seeing this message on another site, it has been stolen and is being used without permission. That's illegal, a violation of copyright, and just plain awful.
Income is money that you make. And more.
When we look at the means test, we begin with a discussion of your income averaged out over the past six months.
If you’re married and living together, we look to your spouse’s income as well.
It’s all part of the quest to determine how much has come into your household.
The shameful part is that it’s not a straight line from paycheck to income.
Why Your Spouse’s Income Matters
Most of my married clients balk at the notion that their spouse’s income needs to be involved in the means test. After all, the reasoning goes, their money is theirs and not mine. If the marriage ends, the spouse gets to walk away wit his or her money.
The law reasons that there is a single household, and into that household comes money from both spouse. It’s all got to be counted so we can determine if the household is making enough to support some form of debt repayment.
It makes logical sense, after all. If your rent is $1,500 per month and your spouse contributes enough money to pay it, that’s less money you need to spend each month.
Your spouse’s separate bills and expenses will be considered later on, but in this phase of the analysis we’re going to use all of the money to find out whether the household falls above or below median income.
Income Is More Than Work
You probably think about income as being the money you make from the work you do. You’re right, but there’s more to it than that.
When you’re doing the means test, income includes money from a variety of other sources such as:
- Interest
- Dividends
- Pension income
- Bonus payments
- Child support and alimony or maintenance payments
- Disability payments under workers compensation or private insurance
- Withdrawals from IRA and 401k plan
- Income tax refunds
Some sources of revenue are not income for purposes of the means test:
- Social security payments
- Unemployment benefits
Feeling Rich Yet?
Once you add up all the sources of income between you and your spouse, you may feel as if there’s something wrong.
After all, just look at all that money. If it were really, income, you’d be doing far better than is truly the case.
Good thing we don’t stop here when it comes to means testing.
How To File Bankruptcy: Income For Means Testing was originally published on Consumer Help Central. If you're seeing this message on another site, it has been stolen and is being used without permission. That's illegal, a violation of copyright, and just plain awful.
Is Washington poised to turn federal student loans into the new adjustable rate mortgage?
On July 1, 2013 rates for new federal student loans will double to 6.8 percent, from 3.4 percent.
Washington is, understandably, a little anxious to change the law to provide for a better solution. A failure to do so will put millions of student loan borrowers in jeopardy, which in turn raises the possibility of more student loan defaults.
So in a fit of pre-recession thinking, the House of Representatives on May 23, 2013 passed a bill that lowered those rates.
For now, that is.
The bill, if passed, will tie federal student loan interest rates to the yield on 10-year treasury bills. Lower treasury bill yields translate into lower federal student loan interest rates, but as those yield creep higher so will the student loan payments.
Though that would take the problem out of the hands of the political machine, it smacks of 2006.
If you remember way back then, back in 2006 it was common for homeowners to take out adjustable-rate mortgages that offered exceptionally low introductory interest rates.
People rushed into the market, snapping up homes and refinancing their existing mortgages in an effort to lower their monthly payments. What they didn’t realize, however, was that those rates could skyrocket to the double-digits if the benchmark rates rose.
Couple those rising mortgage costs with an economic crash the magnitude of which has not been felt since the Great Depression and you had a recipe for disaster.
The House bill ties federal student loan rates to the interest rate on a 10-year Treasury note plus 2.5% with a cap of 8.5%. So when rates rise, loan payments could more than triple.
In a world of full employment and tons of excess cash at the ready, that’s not a disaster. But considering the fact that college graduates aren’t exactly rolling in employment opportunities and disposable income, such a rise in monthly costs would potentially ruin student loan borrowers.
In a worst-case scenario (which isn’t too far-fetched) you’re going to see student loan borrowers simply defaulting on their payments. Some will eventually look into rehabilitation and programs such as income-based repayment and Pay-As-You-Earn will go through the roof, but for the most part people will just stop making payments altogether.
With over $1 trillion in student loan debt out there, it seems that the government would prefer to get paid voluntarily rather than force people into default.
Got an opinion on this? Contact your Senator and your Representative. I know the House voted already, but it pays to let your elected officials know how you feel. In addition, if this bill ultimately fails you’re going to want your Representative to know how you feel about it for the next time around (and there will be a next time).
Image credit: Frank Swift
Federal Student Loans – The New Adjustable Rate Mortgage? was originally published on Consumer Help Central. If you're seeing this message on another site, it has been stolen and is being used without permission. That's illegal, a violation of copyright, and just plain awful.
Bankruptcy is one of the most powerful tools consumers can utilize to regain financial control. When considering this option you should get a clear idea as to how it can help improve your situation. It may help you eliminate qualifying debt obligations while helping you reestablish others. Plus, depending on your situation one chapter may [...]
If you file bankruptcy, you’ve got to complete the means test form. Period.
One of the odder requirements of the bankruptcy law rests in the means test.
The thinking behind it is that people who have had an income higher than more than half of the other people in their state for the six months prior to filing bankruptcy are better able to repay their debts.
Live in California and have three other people living under your roof? If you’ve got primarily consumer debts and made more than half of the other people in California with three other people living with them, you’ve got to worry about the means test.
Means Test Necessary For Primarily Consumer Debts Only
You’ve got to worry about the means test only if your debts are primarily consumer debts in nature. That means if your total debt load is $30,000 then you’re exempted from means testing if you have $15,000.01 in non-consumer debt.
Some debts are easy to categorize as being non-consumer. Business loans, for example, are clearly non-consumer in nature. Tax debts also qualify as being non-consumer debts.
Other debts are more difficult to classify. Credit card debts, for example, may be a hodge-podge of consumer and business debts. Some student loans may qualify as well.
That’s why you want to look through all of your bills and sift through the statements if necessary.
Backward-Looking Income Information
The income information we collect for the means test looks only at the six months immediately prior to filing for bankruptcy.
Take the total income over the past six months, divide it by six to get an average and then multiple it by twelve to get your current monthly income.
If you falls above median income for a household of your size in the state in which you live, you need to complete the entire form. Fall below and you can stop.
Only Half the Story
On first blush, the means test asks for a simple piece of information – your income.
Once you dig deeper, the innocuous-looking form contains hidden land mines.
What’s your income?
What’s the appropriate median income?
What if you had a really great six months, but now you’re not doing as well?
As with the Petition, every answer begs more questions when it comes to bankruptcy.
How To File Bankruptcy: The Means Test was originally published on Consumer Help Central. If you're seeing this message on another site, it has been stolen and is being used without permission. That's illegal, a violation of copyright, and just plain awful.
Pop quiz time. What’s the biggest waste of time and money in the bankruptcy law?
It makes no sense on any level. In order to file for bankruptcy you need to go through a mandatory credit counseling certification process.
Note that I didn’t say you need to go through credit counseling, that “take all your credit card debts and combine them into a single monthly payment” process you know from late-night television and newspaper ads.
Nor did I say you needed to review your financial situation with a certified financial planner to see if there’s another viable option for getting out of debt.
You’ve made the decision to file for bankruptcy, met with a lawyer, sized up your options … and you still have to do this credit counseling certification. And before we begin, let me be clear about one thing – the credit counseling certification process in bankruptcy has absolutely nothing to do with the very valid goal of financial literacy. It is a necessary evil, and nothing more.
Depending on which company my clients use, each year collectively they waste tens of thousands of dollars. They get nothing out of it except a piece of paper that allows them to file for bankruptcy. None complete the process any smarter or better informed.
Why Credit Counseling Is Required Before You File For Bankruptcy
Under the Section 109(h) of the U.S. Bankruptcy Code, you are required to obtain a credit counseling certification from a government-approved organization within 180 days before you file for bankruptcy. There are, however, a few limits exceptions. They are:
- if you live in a district for which the United States trustee (or the bankruptcy administrator, if any) determines that the approved nonprofit budget and credit counseling agencies for such district are not reasonably able to provide adequate services.
- if you submit to the court a certification that: (a) describes exigent circumstances that merit a waiver of the credit counseling requirement; (b) that you requested credit counseling services from an approved nonprofit budget and credit counseling agency, but were unable to obtain the services during the 7-day period beginning on the date on which you made that request; and (c) is satisfactory to the court.
- if the court determines, after notice and hearing, that you are unable to complete the credit counseling certification because of incapacity, disability, or active military duty in a military combat zone.
You may have a shot at #3, but the first two exemption classifications are unheard-of. Don’t fool yourself.
Finding An Approved Credit Counseling Company
The Department of Justice’s U.S. Trustee Program has a massive list of approved credit counseling certification providers. Most lawyers have one or two companies they like to use, either due to lowest price, service, or a combination of both. I’ve used many of them, and find that the only real difference is in price and languages spoken. For example, if I’ve got a client who speaks Tagalog then I’m going to look for a company that offers services in this language.
What To Expect During The Session
The credit counseling session usually lasts between 20-30 minutes. Some places take longer, other shorter. This is a session that doesn’t impart any particular knowledge or wisdom, though; I went through it when the requirement came into law in 2005, and thought it was a glorious waste of time. Therefore, I don’t think there’s anything wrong with a client doing the session while surfing the Internet or flipping through a magazine.
I know, it’s heresy. But it’s my opinion. So there you have it.
Filing The Certification
Once you’ve gone through the session (usually by phone or online – if you’ve got a choice, go with the “online only” option so you can take it without turning down the television), you’ll get a certificate of credit counseling completion. To protect against fraud, the certificates are produced through a central automated system and are numbered.
I usually get it for my clients because it’s easier for me to compile the documents rather than making my client jump through more hoops. You need to file it with your petition, and our computer system will handle that so nothing gets lost in the shuffle.
Don’t Lose Sleep Over This
The credit counseling process is nothing like you’ve gone through. It’s the bankruptcy equivalent of a diploma mill, churning out certificates to all comers. Nobody’s going to pass judgment on you, and nobody’s going to tell you to do something you don’t want to do.
Just go with the flow. Someday Congress will take away this silly requirement, but until then we’re going to have to live with it.
Image credit: Yukon White Light
How To File Bankruptcy: Credit Counseling was originally published on Consumer Help Central. If you're seeing this message on another site, it has been stolen and is being used without permission. That's illegal, a violation of copyright, and just plain awful.
By John Clark
Struggling comedian Sinbad, who reached the height of his fame in the 1990s, is filing for a second bankruptcy, according to an Associated Press report.
The comedian and actor, whose real name is David Adkins, filed for bankruptcy in 2009, but his case was eventually dismissed, sources say.
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Sinbad Seeks Bankruptcy Protection
Sources say Sinbad filed for Chapter 13 bankruptcy last month, and claimed in his bankruptcy petition that he has nearly $11 million worth of debt.
In contrast, the comedian only has $131,000 worth of assets, which suggests that filing bankruptcy may have been his only option to regain something resembling financial health.
Sinbad reached the height of his popularity in the 1990s as he transitioned from comedy to acting. The 56-year-old played a prominent role in some of the period’s most successful family films, including “Houseguest” and “Jingle All the Way.”
But as the movie roles dried up, and his reputation as a comedian began to suffer, Sinbad began to spend more money than he was making, which led to an alarming amount of personal debt.
According to reports, Sinbad is racked with credit card debt, as he owes nearly $375,000 to American Express and $32,199 to Bank of America.
And court documents claim that Sinbad makes $16,000 per month, which may seem like a perfectly suitable salary for most Americans, but it’s certainly no match for $11 million in unpaid loans.
Sinbad Files Second Bankruptcy in Four Years
Sources note that this isn’t the comedian’s first trip to bankruptcy court. Sinbad reportedly filed for bankruptcy in 2009, but a judge dismissed his case because he failed to file the proper documents.
Today, Sinbad has filed again, and sources say that most of his debt burden is related to taxes. The comedian claims to owe more than $8 million to the IRS for unpaid taxes from 1998 to 2006.
In addition, the comedian owes more than $2 million in unpaid taxes to the state of California, and also admits that he failed to pay federal and state taxes over the past three years, as well.
But despite his massive debt load, Sinbad can take comfort in the knowledge that he still has some valuable possessions.
Sources say he owns several cars, including a BMW, a Lincoln Navigator, a VW Beetle, and a Ford F150, as well as $5,000 worth of office equipment and a handful of copies of his book, “Sinbad’s Guide to Life,” which readers looking to stay out of debt may want to avoid.
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