Bi-weekly does not equal semi-monthly: Why the difference matters so much

By Peter Bricks , a Cumming, Georgia bankruptcy attorney.

I recently was replaced another attorney in the middle of a Chapter 13 bankruptcy case in the Northern District of Georgia. My new client mentioned that she had trouble making the plan payments of her confirmed Chapter 13 plan, which were $560 per month.

This client had employer deduction order for her monthly trustee payments. This means the payments were essentially garnished out of her paycheck and mailed to her bankruptcy trustee, which is fairly typical of Chapter 13 plans.

After reviewing the deduction order, I noticed something odd. The deduction order called for the debtor to pay $280 per paycheck. Why was this wrong? The debtor’s employer pays her bi-weekly and not semi-monthly.

While debtors often use the term interchangeably, they mean vastly different things. Someone paid bi-weekly gets paid 13 times over 6 months (26 times in a year), whereas someone paid semi-monthly only gets paid 12 times over 6 months (24 times a year).

In reviewing the debtor’s account ledger, I realized the debtor had overpaid her trustee payments by over $1,000, because this mistake had been going on for over a year.

A similar problem I face is when reviewing people’s monthly budgets, they often tell me what they spend weekly and then multiply that amount by four to get a monthly figure. This is also incorrect, because there are 4.33 weeks in a month.

Math mistakes like this can lead to all sorts of problems, particularly incorrect figures on a means test. Additionally, it can cause great interference with a Chapter 13 trustee payment, because the debtor is going to struggle to make payments if the figures he is using are incorrect.

Peter Bricks is a member of the National Association of Consumer Bankruptcy Attorneys. He has bankruptcy attorney offices in Atlanta, Woodstock, Dunwoody, Cumming and Jonesboro, Georgia.

Means Test: Impact of the 2013 payroll tax increase

Means test: Impact of the 2013 payroll tax increase

By Peter Bricks, an Atlanta bankruptcy attorney

While one could write a novel about all of the various intricacies of the means test in Chapter 7 or Chapter 13 bankruptcy, I’m going to narrowly focus this blog on the increase in the payroll tax, which took effect January 1, 2013.

The means test is used to determine whether someone is presumptively unable to qualify for a Chapter 7 discharge due to having too much disposable household income, as well as to at least partially determine how much disposable income the debtor has to pay unsecured creditors in Chapter 13.

While these figures are subject to potential reconfiguration and challenges due to change in circumstances, the numbers on paper are determined by considering the debtor’s gross income over the previous six months subtracted against various allowable deductions. As expected, one of those deductions is the amount the debtor pays in payroll tax.

When the payroll tax increased by 2% of the debtor’s overall salary on January 1, 2013 (up to a $113,700 cap (up from $110,100 in 2012), the debtor therefore began taking in less income, which in turn left less money for the debtor to repay creditors. A January 2013 means test reflected income from July-December 2012, and therefore did not accurately reflect the debtor’s new situation in regards to an increased payroll tax liability.

As we get further away from January 2013, this increase becomes less relevant in means test calculations, because each new month added to the test includes the new tax and replaces a month that does not. However, it will not be until July 1, 2013 where a test will no longer at least be partially skewed by this tax increase. Furthermore, it’s important to consider that those closest to the cap are impacted more than those making less.

Because a Chapter 7 does not include a repayment and simply comes down to qualification for discharge, this increase is arguably more important to Chapter 13 cases, because many debtors in active Chapter 13 bankruptcies have had their trustee payment based upon a lower tax base. As such, some of those changes in circumstance might even need post-confirmation modifications to address the fact the debtor now has less disposable income and might not be able to make plan payments anymore.

Peter Bricks is a member of the National Association of Consumer Bankruptcy Attorneys. He has bankruptcy attorney offices in Woodstock, Dunwoody, Cumming and Jonesboro, Georgia.

Does the Means Test Still Apply if I Convert a Chapter 13 Bankruptcy to a Chapter 7 Bankruptcy?

By John Hilla, a Michigan Bankruptcy Attorney

When you file either a Chapter 13 Bankruptcy or a Chapter 7 Bankruptcy, you must file also a “means test,” which is the income-based eligility test which determines, in a Chapter 7, whether you are eligible for the Chapter 7 or, in a Chapter 13, whether you are eligible for a Chapter 13 payment plan that is shorter than 60 months long. The “means test” is actually form which calculates your average household income over the six months prior to the month in which you filed your bankruptcy. The result of that calculation—a high or low result relative to the median income of a household of your size for the state in which you live—makes the above determinations.

When you file a Chapter 13 Bankruptcy, you file a means test based on the six months prior to that filing, and that means test very likely indicates that your household earns too much money for Chapter 7 eligibility, although there are many good reasons to file a Chapter 13 beyond basic Chapter 7 ineligibility. However, what happens if your household loses a source of income, such that remaining in the Chapter 13 payment plan is no longer feasible for you?

It is a simple matter to convert a Chapter 13 to a Chapter 7 under such circumstances. The US Bankrutpcy Code gives consumers a virtually absolute right to convert a Chapter 13 to a Chapter 7 bankruptcy (the opposite is not necessarily true!). But what do you do, then, with a means test dating back to the six months prior to the original filing that says you are not eligbile for a Chapter 7, despite the fact that that means test may have been filed years prior to the event causing the loss of income and the infeasibility of the Chapter 13?

The case-law is somewhat divided on the subject on the various details, but it is fairly well-accepted that the means test look-back income period that applies to the converted Chapter 7 is the six-month period of time prior to the filing of the original Chapter 13. From there, different Federal jurisdictions (bankruptcy is a Federal legal process) have different requirements for handling this and explaining the difference between the income then and the income NOW and the current need for a Chapter 7 bankruptcy where only a Chapter 13 was possible before.

In the Eastern District of Michigan where I practice, for example, we are required to file a new Chapter 7 means test upon conversion, however with the same period of time in the calculation. Along with that Chapter 7 means test (which varies in form, content, and intent a bit from the Chapter 13 version), we file a sworn affidavit from the debtor explaining the loss in income necessitating the conversion—and then email a whole lot of supporting documentation (letter of termination from debtor’s former employer, etc.) to the US Trustee. The court clerk will often file a “Presumption of Abuse” upon the filing of the new Chapter 7 means test (because the little box that says “presumption of abuse” on the actual form will still be checked, given that it is still calculating that old six-month period of income), but it is the job of the US Trustee, which is a division of the US Department of Justice, to decide whether there really is an any abuse. If they think that there is, they will file a motion to dismiss the case—which could, if filed with good reason, result in the case being converted back to a Chapter 13 (or just being dismissed).

However, short of that, the US Trustee and the Chapter 7 bankruptcy Trustee will usually agree, if the conversion is premised on a bona fide change of circumstances, that there is no abuse and allow the case to proceed to discharge.

Again, the variations on this process will be potentially extreme depending upon where you reside and have filed your case.

The take-away from all of this for you, the consumer, is that it is important to keep in mind that a Chapter 13 bankruptcy is not a prison-sentence. If it ceases to function for you on a practical level because you do suffer a change of circumstances, there is a path out to earlier discharge through Chapter 7 conversion. It is important to have, however, an experienced bankruptcy attorney working with you as none of these steps will be apparent to the pro se debtor filing a case on his or her own.

 

Vehicle Ownership Expense in the Means Test

Vehicle Ownership Expense in the Means Test

In a bankruptcy, the means test must be completed with the debtor’s last six months of income. If the debtor is over median for their household size, additional information must be provided in the means test to see if the debtor is still eligible to file a Chapter 7 bankruptcy based on certain expenses. If they are under abuse, they can file a Chapter 7. Otherwise, they must file a Chapter 13 bankruptcy. There are certain expenses that are automatically imputed for the debtor, and then there are other expenses the debtor will receive a credit for in the means test, such as mortgage, car payments, taxes they pay, health insurance, life insurance, security expenses (security systems, etc.), and telecommunication expenses, etc.

The means test allows for a vehicle ownership expense for a vehicle in the debtor’s name. Line 22A of the means test asks for the number of vehicles the debtor operates. Lines 23 and 24 ask for the number of vehicles for which there is an operating/lease expense. For a single bankruptcy, the debtor can only claim operating/ownership expenses for one vehicle. If the debtors are filing jointly, they can claim two vehicles. The operating/lease expense can only be claimed if there is a secured lien on the vehicle that the debtor is paying. If the debtor does not have a loan on the vehicle, they are not entitled to the $517.00 operating/lease deduction. The debtor is entitled, however, to a deduction for actual expenses they incur for the vehicle. For example, if the debtor spends $200 per month on the vehicle for oil changes and repairs, that amount can be used as a deduction in the means test. If the debtor does not have regular monthly expenses for the vehicle, they are not entitled to a deduction for a vehicle with no loan against it.

If you have questions, please contact a St. Louis or St. Charles bankruptcy attorney.