Bankruptcy Means Test – Should I Worry About It?

Transcript:

Hello, this is Jeff Kelly and Today is November 21 2019. And today I would like to talk about the topic of the bankruptcy means test. So what is the Means Test? Some people call it the median income test. Basically, this was like the main driver of when the bankruptcy laws were reformed way back in October 2005. I cannot believe it’s been that long ago, it seems like yesterday to me, but I remember that day. And the purpose was that, you know, Congress reformed the bankruptcy laws so that basically if you make more money than an average family of your size, then they don’t want you to be allowed to wipe out all of your debts in a chapter 7. They want you to file chapter 13. Now the philosophy is That there is closer scrutiny in a 13 as opposed to a chapter 7. I don’t know that’s necessarily true. I have found the chapter seven trustees to be just as anal and nitpicky as chapter 13 trustees.

I think they’re they both guard the gate very well. You’re not going to slide anything past a 13 trustee or a chapter 7 trustee. But that was a philosophy is there is this myth out there that all these people were making great incomes and filing chapter 7 when they shouldn’t have been and the poor old credit card companies that are ripping off America by charging 30% interest or more, it was just unfair to them. So they created this thing called the median income test. Now, what I tell all my clients is is this median income test is not a product of logic or sense. It is a product of Congress. So sometimes it makes absolutely no sense, but here’s the gist. The IRS keeps statistics on family sizes, and what’s the average income and how much a average family of a certain size needs for housing and food and clothing and things like that not all of this stuff is part of the median income test. And it’s very common to hear people who potentially need to file chapter 13 or chapter 7, they go online, and they find some online median income test and they plug in their numbers and they say, Oh, crap, I’m not going to be able to do anything. There’s no hope for me whatsoever and that’s totally wrong because they don’t know what they’re doing. The the meaning income test is complicated, the numbers change and so what’s funny is a lot of the numbers that you see online are outdated and you know, the median incomes go up.

As inflation goes up, the median income numbers go up and the IRS they update those at least every, you know, quarter every six months or so our software we have to get it updated to reflect these new numbers. So why not take advantage of a free consultation if you’re have debt issues, do not do not depend on something, you know, tests you found online, because there’s a good chance that it’s not going to be accurate.

It makes sense to come sit down with a bankruptcy attorney. It’s a free consultation if you live in metro Atlanta or anywhere in northwest Georgia. We’ll be happy to sit down with you and and go over it. So what would we need if you think you’re going to be over median income? What do we need? Well, We need to look at your income for the last six month period. Now when I say last six month period, I mean, not the current month, but the month prior and on back. So for example, today is November 21, so if you were filing with me today, I would not need to know the income for November. That’s not what’s going to count. It’s going to be May 1 through the end of October, that is the magic period and so we are going to need to look at your total gross income for that period, everything you earned. And we’re also going to need to know how much did your employer take out for taxes? How much did they take out for health insurance? How much did they take out for a 401k retirement plan? Do you have a 401k loan? And this is one that people typically miss when they’re filling out these online forms is child support.

Do you pay child support because that is deductible on the Means Test? It matters and You know, as much as I like to rag on the Means Test, I will say this, most of the time when it’s filled out accurately and the numbers are truly accurate, whatever number we get out is usually pretty fair. So let me dispel a myth here real quickly. If you think that you’re going to get the median income test and have some amount of data that’s going to be impossible to pay back. No, that’s not correct. If you’re getting an impossible number, you’ve probably put the numbers in incorrectly. So yeah, so we need to get the last six month period. We know what happens if you do get a positive number at the end of the Means Test.

What does that mean? So let me give you an example. Let’s say we do it and you have a number at the very end and it is a positive 500. Okay, so what that means is you’re going to take 500 and you’re going to multiply it by 60 months. That equals 30,000. So what that would mean is somebody with a positive number, they’re going to have to pay back $30,000 to their unsecured creditors in a chapter 13 plan, they’re not going to be able to do chapter seven. Now, what if they unsecured debt is only 15,000? Well, obviously, you’re only going to have to pay back the 15,000. But you’re going to be in a what’s called a 100% chapter 13 plan. Why on earth would you want to be in a 100% chapter 13 plan? Well, they can’t charge any more interest or late fees on unsecured debt. And when you’re talking about high numbers, man, you can save a lot of money even in a 100% chapter 13 plan. Let’s say you owe $100,000 in unsecured debt and credit cards, but the Means Test says you’re gonna have to pay back 30,000 in a chapter 13 plan well, that’s that’s all you’re going to have to pay back.

Assuming that we can make it work on schedule i and j. So There’s a lot of what ifs, there’s a lot of twist. There’s a lot of terms. Typically when a client asked me a question, you know, many times I will fishy facetiously answer. Yes, no kind of sort of not really, it depends. And there’s a lot of truth to that answer. There’s a lot of twists a lot of turns. Yes. If this know if that. The bottom line is, if you’ve got debt issues, you need to meet with a bankruptcy attorney. So call my office (770) 881-8449. I’ve got a free book on my website, www.kellycanhelp.com. Take a look at it. Again, if you got any questions, hopefully we’ll talk to you soon. Thank you Have a great day.