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.



Even the big guys are guilty of making matters worse through denial-Detroit’s bankruptcy experience is an object lesson for many others

As you know the City of Detroit filed a Chapter 11 bankruptcy, and after a lengthy and expensive process, is emerging from Chapter 11, ostensibly with its finances in order and its future brighter. A recently reported interview with the now-retired bankruptcy judge who handled the bankruptcy suggests that in the years leading to its bankruptcy, Detroit’s city fathers fell victim to a common malady, namely desperation and denial, and that this led to expensive mistakes.

According reports of an interview given by Judge Steven Rhodes, the city made an expensive and ill-considered deal to try to fend off  the pension default that ultimately was a major impetus to its bankruptcy filing. The suggestion is that the City would have been better off had it simply bit the bullet earlier.

This syndrome of denial and “kicking the can down the road” is, in my experience, all to common, and leads to desperate and ill-considered attempts to stop the inevitable bankruptcy.

A common example is the business owner who borrows money against her home (or from the IRS by not handing over employee withholding trust funds) to keep a failing business alive. To be sure, saving a viable business and carrying it through a temporary rough patch is not a bad thing. The problem is that too often, there has been no effort to find out what is causing the problems, and no effort to deal with those problems.

Another face of this is the refusal to even consider the option of bankruptcy as an alternative until quite late in the game. Sometimes by the time this is considered, the situation has gone from bad but cureable to desperate and incurable.

Our advice to business owners is to always consider all the options, and to do so earlier rather than later. An early bankruptcy might solve critical problems that will only get worse and save the business, whereas later matters have gotten out of hand, and the once-saveable business is doomed.

Individuals are just a guilty of this. I cannot count the number of times I have seen couples  whose solution to mounting credit card debt caused by income that was not enough to cover their spending was to borrow against home equity or emptying retirement accounts.  The underlying problem is still there, and like Detroit, they are just “kicking the can down the road”

The lesson of Detroit is that financial problems do not get solved unless one gets to the source. Short term solutions, such as borrowing more money to meet a cash flow deficit, just delays the inevitable and makes matters worse.

It is never too soon for people or businesses in financial trouble to engage in careful and broad based planning. All choices and options should be considered.



Can Bankruptcy Help You If You Owe Money Because of a Car Accident?

Can You Use Bankruptcy to Discharge a Judgment against You Resulting from an Accident?

Car accidentThough most judgments and settlements in motor vehicle accident cases are paid and defended by insurance companies, it is possible to have personal liabilities that are not covered by insurance. For example, you may not have any insurance coverage, or not enough coverage. In some cases, the insurance company, rather than defending, may “offer the policy limits” to the defendant. If the damages are more than that amount you may end up on the receiving end of a collection action.

Most insurance will not cover suits arising from an assault or other intentional tort, such as a bar fight.

So the first line of defense is making sure you are insured. But if you are not covered, a bankruptcy discharge may provide you the relief you need. But not all such debts are dischargeable.
Debts arising from death or personal injury caused by illegal operation of a motor vehicle boat or aircraft while drunk or under the influence of an illegal drug cannot be discharged in any bankruptcy. If there is insurance, the insurer will still have to pay, but anything the insurance does not pay will still be your liability after your bankruptcy discharge.

If convicted and required to pay restitution or fines as part of a sentence, that amount will be non-dischargeable in either Chapter 7 or Chapter 13. Note however that in New Jersey, motor vehicle insurance surcharges, but not criminal fines or penalties, can be discharged either in Chapter 7 or Chapter 13.

Debts arising from willful and malicious injury to a person or property may become non-dischargeable in a Chapter 7 case if the injured person files a lawsuit in the bankruptcy case seeking such a ruling. There is a limited time for such suits and if the deadline is missed, the debt is discharged. In a Chapter 13 case, no such requirement exists, and if death or personal injury was caused, the debt is not discharged. However, debts for willful and malicious injury to property (eg. vandalism) can be discharged.

A special caution is in order here. To qualify for Chapter 13, the total unsecured debt in a fixed and determinable amount cannot exceed a dollar limit, currently $383,175.00. Once a jury verdict, settlement or judgment is entered specifying the liability, that liability gets added to this total. Thus it may be critical to file a Chapter 13 case while the injury or criminal case is still pending and before any of this happens.
As always, it is best to avoid these types of situations, but if these issues exist,

Contact Neuner & Ventura, LLP

At Neuner & Ventura, LLP, we provide a free initial consultation to every client. To set up a meeting, call Neuner & Ventura 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.

Representing Clients across South Jersey



Chapter 13 to Manage Tax Arrearages

Managing Tax Debt with a Chapter 13 Plan

IRS buldingAs a general rule, a bankruptcy discharge will not remove personal liability for most tax debts. See our previous blog post on that subject. Generally, taxes that are non-dischargeable are also entitled to a priority in payment in Chapter 13, and must be paid in full over time under an approved Chapter 13 plan. Those debts that are not “priority debt” will be discharged with the same right to payment as other “non-priority, unsecured debt” such as credit cards. That debt will be pooled with other similarly situated debt, such as medical expenses and credit card debt, and the amount of payments on those debts depends on a number of factors, including how much income is available after priority and secured debt have been paid. Often, these debts are only partially paid, with any amounts still upon completion of all plan payments being discharged.

Tax Liens may be subject to “cram down”

Taxing authorities such as the IRS and states such as New Jersey will obtain tax liens by various means. For the IRS to have a valid enforceable lien in a New Jersey bankruptcy, it must file a Notice of Tax Lien in the county where you own real estate, or where you reside or where a business has its principal place of business. Unless modified, these liens must either be satisfied or remain undisturbed in a Chapter 13 bankruptcy. This would mean that the lien is still attached to real estate or other property when the bankruptcy is over.

However, under a procedure called “cram-down” a tax lien can be reduced to the value of all property to which it attaches, and if that amount is paid, can be removed at the end of a case. For example, if John has $120,000.00 in IRS liens, but the total value of everything he owns, (including profit sharing plans) is only $50,000.00, then he is permitted to pay only $50,000.00 and upon paying that amount to the IRS in his Chapter 13 plan, the lien will be discharged and removed.

Taxes are complex and specialized advice is needed. IRS CIRCULAR 230 DISCLOSURE: Pursuant to Treasury Regulations, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used or relied upon by you or any other person, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax advice addressed herein.

Contact Neuner & Ventura, LLP

At Neuner & Ventura, LLP, we know that the bankruptcy process can be intimidating and confusing. We offer a free initial consultation to every client. For 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.

Representing Clients across South Jersey



Avoiding the debt trap: high-interest car title loans

For most people, reliable transportation is the key to survival. Without a way to get to work, there is no income to pay for food, rent or mortgage payments, and the other essentials. But few people have the cash to buy a car outright. And with poor credit or poor planning. the quest for a car can become a trap in itself. But there may be a way out…

Remember the subprime mortgage fiasco? Anyone who was breathing and had some income could buy a home with little or no money down. Now the same thing is happening with car loans. But these loans often come with very high interest. Those who have not done a budget to know how much they can afford can get trapped.

Even worse are the “title loans”. Just as many states have outlawed “payday loans” with high interest and never-ending payments, shrewd subprime lenders and the investors that back them have come up with a new twist: lending money at high interest backed up by the title to your car. They have accurately concluded that most people will do anything to avoid losing a car that is essential to working and living.

The trap this creates was recently illuminated by a New York Times article, “Rise in Loans Linked to Cars is Hurting Poor” http://dealbook.nytimes.com/2014/12/25/dipping-into-auto-equity-devastates-many-borrowers/?_r=0. Sky high interest rates. Working people trapped by the never-ending cycle of payments. Loans advertised as “easy cash” that are anything but. Loan balances that far exceed the value of the car.

Those who, out of need or desperation, are considering these types of loans should read this article. With a bit of luck and some planning, these types of loans should be avoided whenever possible.

For those who are trapped in these types of non-purchase money car title loan arrangements and who otherwise qualify, a bankruptcy under Chapter 13 may provide relief, including reduction in loan balances or interest rates, (“cramdown”) or the alternative of buying back the car at market value through payments over as much as 60 months.



Using a Chapter 13 Bankruptcy to Help Sell Your Home

Can a Bankruptcy Filing Help You Sell Your Home?

Home for saleSometimes, homeowners are prevented from selling their home because of unpaid judgments. Normally, these judgments have to paid or satisfied for a home-seller to deliver clear title to the buyer. But the judgments may make that impossible. That is where a bankruptcy can come in.

Any bankruptcy will normally result in a discharge of debts, including most that have been reduced to judgment. In a bankruptcy, the debtor/homeowner has the power to “avoid” judgments under certain limitations. In Chapter 7 bankruptcies, this is done by filing a motion for “lien avoidance”. In Chapter 13, in New Jersey, judgments can be avoided under an approved Chapter 13 Plan. Once all the payments are made, the court can enter an order avoiding and removing the judgments, even if they have not been fully paid.

Judgments are only avoided to the extent that they “impair” the debtor’s right to exempt the value of the home. If the value of the home, minus the total of all mortgages and judgments, minus the amount that can be claimed as exempt, is a positive value, the judgment might not be subject to being totally avoided.

In New Jersey, those who have received a bankruptcy discharge more than 12 months ago can file a state court motion to “cancel” judgments. This is an alternative that may work well for many people.

Using a Chapter 13 Petition to Avoid having to sell your home

A Chapter 13 Bankruptcy can be used to bring a mortgage current and to stop judgment holders or other creditors from demanding or seizing your income. In this way, a sale of the home may not be needed. See our other blog articles where this is discussed.

Contact Neuner & Ventura, LLP

At Neuner & Ventura, LLP, we provide 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. To set up an appointment, call our office at 856-596-2828 or send us an e-mail. Evening and weekend appointments are available upon request.

Representing Clients Across Central and Southern New Jersey



Using a Chapter 13 Bankruptcy Filing to Keep Your Home

Large HomeIf you face unmanageable debt and are facing foreclosure or behind on your mortgage payments, but still want to try to keep your home, a Chapter 13 bankruptcy may be your best option. A Chapter 13 bankruptcy is a simplified form of personal reorganization for individuals, in which you pay your creditors according to a court-approved plan. Here’s how a Chapter 13 works in this situation.

Once you file for protection under Chapter 13, an automatic stay goes into effect. Under the automatic stay, your creditors (including your mortgage lender) must immediately stop all efforts to collect the debt, other than through the bankruptcy proceeding. This stay means they cannot call, write or take any legal action — file or continue lawsuits, initiate foreclosure proceedings, etc. — in an attempt to get you to pay any amount on the debt.
In a Chapter 13 proceeding, you can take up to five years to bring your mortgage payments current, provided you start paying again and remain current after filing your bankruptcy. How you do this is based on a plan that needs to receive court approval and in most cases, to have the approval of the Chapter 13 trustee. Typically, you will work with your attorney to propose a plan that takes into consideration your income as well as all your debt. In order for the plan to be approved, certain requirements apply. First, you have to have money left over to pay the trustee after you meet your basic living expenses. (this is called “disposable income”). If your income is high enough, your minimum payment may be dictated by a formula commonly known as the “Means Test.” You must fully pay most taxes and any child support or alimony arrears, as well as other “priority” debts. You qualify only if your debts are under certain eligibility limits. You can expect to be required to contribute “substantially all” of your “disposable” income through the plan. You have to pay your creditors at least what they would have gotten in a Chapter 7 bankruptcy. If you meet all these requirements, court approval, or “confirmation” of the plan generally follows in due course.

While your plan is underway, the automatic stay remains in effect throughout the entire three-to-five-year period. You must, however, stay current with the payment arrangements or the bankruptcy court may terminate the bankruptcy and lift the automatic stay.

Bankruptcy is only one of the many practical and legal considerations in these situations. Getting early advice from an experienced and qualified bankruptcy attorney is very important to maximizing your chances of success.

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 Central and Southern New Jersey



The Impact of Bankruptcy on Jointly Owned Property

Family in car lot, looking at red car.If you face a mountain of debt and have concluded that the only way you can get a fresh start is through a personal bankruptcy filing, you may concerned about the impact of a bankruptcy on jointly owned property. What if you are named on the bank account of a parent or elderly relative as a convenience to facilitate the payment of their bills? What if you had a parent or friend co-sign a loan for you?

Creditor or Trustee access to Jointly Held Property

The simple reality is that (with few exceptions) any property in which you have any ownership interest is potentially subject to being used to pay creditors in a bankruptcy proceeding, unless you can properly exempt it. The good news is that the amount of the jointly held property available to the bankruptcy court will typically be only your individual interest.

In New Jersey, money in a joint bank account is presumed to belong to each account owner in the same proportion as each contributed money to the account, unless there is clear and convincing evidence of an intent to make a gift.

A common situation we see is where an elderly parent adds a child as a joint account holder “for convenience” so the child can help manage the money or pay bills. If you are the child and can document that the money all came from the parent without an intent to make a gift, a trustee will probably leave it alone. But if you have not filed a bankruptcy, the bank account could be subject to a bank levy by one of your judgment creditors without notice. Then the account is frozen until you or your unhappy parent can go to court (weeks later) to show that the money is not yours.

We recommend against this arrangement. Parent and child should go to the bank and make arrangements for the child to have signature authority on the account under a power of attorney.

Another potentially troublesome situation arises where a parent takes title to a car that a minor child bought or is paying for using her own money. Usually this is done “for insurance purposes”. The car is still an asset of a bankruptcy estate, and is still subject to a sheriff’s levy ordered by an unpaid judgment creditor. In a bankruptcy, we have generally been able to protect the car under the theory that the car is “legally but not beneficially” owned by the parent.

These types of situations are just some of the examples that can arise. If you are facing financial difficulties, we counsel against keeping your money or assets in joint names with others. However, before transferring things around, you need to get qualified legal advice that can come from such transfers if done improperly.

Contact Our Office

Let us help you minimize the stress, anxiety and confusion that come with a personal bankruptcy filing. At Neuner & Ventura, LLP, 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



Bankruptcy and Retirement Benefits

Protecting Your Retirement When You Face Bankruptcy

American Board of CertificationYou’ve worked hard to build a nest egg for your retirement, faithfully contributing to an IRA or a 401(k). Maybe you’ve had health problems or lost your job, though, and the bills have piled up. You may see bankruptcy as the only way to get back on your feet again. If you file for bankruptcy, will you lose your retirement funds and be forced to start all over again?

The Exemption of Retirement Accounts in Bankruptcy Proceedings

As a general rule, most pension and retirement funds may not be taken or used by creditors in a bankruptcy proceeding. In a Chapter 7 case, they cannot be liquidated to satisfy creditors.

The rule protecting pension and retirement accounts includes all types, 401(k) accounts, 403(b) accounts, profit sharing plans, money purchase plans, Keoghs and defined benefit plans, so long as they are properly set up as “ERISA Qualified”. For New Jersey residents, any form of IRA is also protected, unless the IRA funds were improperly or fraudulently put there. (Inherited IRA’s are an open issue right now, a question the US Supreme Court is presently considering) In other states, different exemptions may apply.

Social Security is always protected.

Federal law protects Social Security benefits from claims of creditors. This protection continues after you receive the money, as long as you can “trace” the money in an account back to Social Security payments. We recommend against mixing in Social Security payments in an account with substantial amounts of money from other sources.

This area, like so many others, is potentially complex. This discussion is fairly general. Independent review by a qualified attorney is highly recommended.

Contact Neuner & Ventura, LLP

At Neuner & Ventura, LLP, we provide 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. To set up an appointment, call our office at 856-596-2828 or send us an e-mail. Evening and weekend appointments are available upon request.



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