Archives for March 2015

The Income Side of the Means Test

The Income Component of the Bankruptcy Means Test

Man paying billsUnder the “Means Test established by the 2005 revisions to the federal bankruptcy laws, certain people needing bankruptcy protection may be disqualified from a Chapter 7 bankruptcy, and in a Chapter 13 bankruptcy must make calculated minimum payments to unsecured creditors over a required five year period. The Means Test was intended to catch people with high income and abnormally high expenses and force them to pay based on the same formula that the IRS uses in calculating repayment plans for those who owe federal taxes.

The Means Test does not apply if one of the following is true:

  1. Your debts are primarily business or business related debts;
  2. You are a disabled veteran and your debts occurred primarily while you were on active duty in the armed forces, or in the armed forces reserves or National Guard or within 540 days after the end of that service
  3. Your “current monthly income” based on the past 6 months is less than the median income in the state where you life, for your size household.

“Current monthly income” under the Means Test is the average monthly gross income for the six month period prior to the filing of your petition. This includes all forms of income (other than Social Security), whether taxed or not, such as:

  • Gross wages, tips and salaries, including bonuses and commissions (before payroll deductions)
  • Gross business or investment income
  • Income from retirement plans
  • Disability payments other than Social Security disability
  • Regular contributions by others to cover household expenses

Generally, the court or the trustee will look at the total gross income for the six month period and divide by six.

Once your current monthly income is calculated, the bankruptcy court or the trustee will compare your average current monthly income with the median in your state, also taking into account your household size. (The median is the number at which half the households earn more and half earn less). If you fall below the median, you automatically pass the means test.

If your income exceeds the median, you may still be able to discharge debts through Chapter 7, but the computation will be far more complex. At that point, a complicated multi-part formula of allowed expenses is applied. If after deducting the allowed expenses, the amount remaining (called “disposable income”) is at or below what is allowed (again based on a multi-part formula), you can still qualify under Chapter 7.

Needless to say, this is an area where experienced and qualified legal advice is essential.

Contact Neuner & Ventura, LLP

At Neuner & Ventura, LLP, we know the personal challenges that come with a potential bankruptcy filing. We offer a free initial consultation to every client. We do, however, reserve the right to charge a fee to review any work done by another attorney.

For an appointment, call Neuner & Ventura at (856) 596-2828 or send us an e-mail. Evening and weekend appointments are available upon request.

Representing Clients across South Jersey

Inherited IRA’s are not part of a bankruptcy estate in New Jersey, Bankruptcy Court holds

In a personal  bankruptcy of an individual, money and assets held in certain qualified trusts  are “excluded” and do not become part of the Debtor’s bankruptcy estate that, if not exempted, becomes available for sale by a trustee to pay creditors. Qualified pensions are a common example. Excluded assets need not be exempted to be retained by the debtor in bankruptcy.

As we previously reported, in 2014 the Supreme Court in Clark v Rameker held that under Wisconsin law, an inherited IRA was not an IRA that would fit into the generous federal exemption for IRA’s. The reason was that unlike normal IRA’s the money in these accounts could be access and used at any time without tax penalty. At the time, we questioned whether this would hold true in New Jersey, which has a statute protecting inherited IRA’s from claims of creditors or a bankruptcy trustee. N.J.S.A. 25:2-1(b).

On February 25, 2015, New Jersey Bankruptcy Judge Michael Kaplan held in In re Andolino,  2015 Bankr. LEXIS 577, that an inherited IRA is excluded from the bankruptcy estate. Clark, he held, did not address this issue. Under New Jersey law, any “qualified trust” is protected, and includes any “trust created, qualified or maintained” under section 408 of the Internal Revenue Code.  Since the IRA which Mr. Andolino inherited was a qualified trust when created, and remains so even after he inherited it from his mother, it cannot be included in a bankruptcy estate.

The opinion has been submitted for publication, so it should become persuasive if not binding on other New Jersey Bankruptcy courts. Since the reasoning and the statutory basis are clear, logical and persuasive, we expect most courts at least in New Jersey will follow it.

Credit Reporting Agencies promise to make it easier to correct credit report errors.

Our credit reports are our financial reputations, and are for that reason very important. Unfortunately, mistakes and errors are far too common. Even though there is a well established process for people to correct errors in their credit reports, the Big Three credit reporting agencies have made the process frustrating and overly-bureaucratic for those who could not afford a lawyer. This was the subject of an investigation by the New York Attorney General that has now led to a settlement. http://www.nytimes.com/2015/03/10/business/big-credit-reporting-agencies-to-overhaul-error-fixing-process.html?_r=0. 

As detailed in the March 10, 2015 report in the New York Times, Equifax, Trans Union and Experian will replace their largely automated (and frustrating) dispute resolution process with a staff of specially trained individuals. Most importantly, they have agreed to put a 6 month hold on adverse reports concerning medical bills. This is a recognition that these are more commonly the subject of a billing dispute rather than non-payment.

The AG investigation found that the existing process was often ineffective in correcting legitimate errors. Creditors reporting a bad debt were given deference in the investigative process, resulting in improper automatic rejection of claimed errors.

We hope these changes will make it easier for people to correct their credit reports. However, we still recommend that any inquiries and disputes be followed with a letter detailing the problem. If a proper correction does not occur within 30 days, a lawyer should be consulted.

We suspect that where an attorney gets involved, the response from the credit reporting agencies will be escalated to a higher level.

Annual monitoring of your individual credit report is always a good idea. (For New Jersey residents, a free credit report is available once a year through www.annualcreditreport.com) While no one can eliminate a truthful adverse credit record (at least until 7 years after it goes to “charge off” or collections), what is there should still be accurate.  In fact, we recommend that our bankruptcy clients check their credit reports after a bankruptcy discharge to make sure that none of the discharged debts show anything other than a zero balance due.

Stay tuned…

The Hardship Discharge for Student Loans

The Limited Circumstances Where You Can Discharge Student Loan Debt in Bankruptcy

Student with tabletIf you have overwhelming debt from financing a college education, you are not alone. According to recent studies, the average amount of debt college graduates face now exceeds $30,000. More than seven out of every ten graduates will have some type of debt. The average total student loan bill for graduates of for-profit colleges is nearly $40,000.

If you haven’t found a job that will allow you to repay that student debt, you may have considered bankruptcy as a way to get a fresh start. Unfortunately, it’s extremely difficult to discharge most student loan obligations in bankruptcy. Most, but not all “student loans” are made non-dischargeable unless you can prove “undue hardship”, which as we will see is a difficult test to pass.

Before we get to what you have to prove to get a student loan discharged, let’s clarify that not every loan which is used for education is made non-dischargeable. “Student loans” are those which were

  1. made, insured or guaranteed by a federal, state or other governmental unit;
  2. made under a program funded by a governmental unit or non-profit institution; or
  3. otherwise meet the tax qualifications for a “qualified education loan”; or
  4. arise from an overpayment of a scholarship, grant, stipend, or other educational benefit.

So the starting point is to find out what type of loan you have. Hopefully you saved or can get the loan papers. If your debt fits into one of the above categories, here’s what you need to demonstrate to have a chance of ridding yourself of student loan debt in a Chapter 7 proceeding.

The Undue Hardship Discharge

Under the generally-recognized “Brunner test” (named for a Supreme Court decision of that name, you must prove:

  • The you lack the financial resources to pay student loan debt and maintain a minimum standard of living
  • That you have tried, in good faith, to repay student loans
  • That there is no expectation that your financial situation will change for the foreseeable future

The determination that you lack the financial resources to repay student loans and have the basic needs of life is decided on a case by case basis, and can vary substantially. While the courts don’t necessarily require that you have no discretionary income, at least one court has held that a disposable income of less than $200 per month after expenses was not an undue hardship. It is a very hard test to meet.

New Jersey and Pennsylvania bankruptcy courts generally follow the Brunner test. Some other courts have applied what is called “the totality of the circumstances,” examining income, expenses, spending habits and other factors to determine whether the payment of student loan debt constitutes a dischargeable hardship.

The majority of courts hold that you must either discharge all of your student loan debt or none of it. Some, though, have approved or required a partial discharge of student loan debt based on hardship.

We recommend that clients with non-dischargeable student loans look into non-bankruptcy alternatives, including income-based repayment plans, and programs that discharge the loan after a period of time. These exist for federal loans, but not New Jersey state loans. In some cases, these valuable rights can be lost by use of a loan consolidation.

Another option is to use bankruptcy. While student loans may not be dischargeable, other debts may be, thus freeing up income to pay the student loans. We have also used Chapter 13 to create a five-year payment “breather” in which student loans get partially paid through the plan. While any unpaid balance on the student loans will still be due at the end of the plan, the “breather” can help get things back on track.

Contact Neuner & Ventura, LLP

To schedule an appointment, call our office at (856) 596-2828 or send us an e-mail. We do, however, reserve the right to charge a fee to review any work done by another attorney. Evening and weekend appointments are available upon request. There is no cost or obligation for your first meeting.

Representing Clients across South Jersey

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