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

When Tax Debts Can Be Discharged in Chapter 7

Can You Discharge Tax Debt in Chapter 7?

Tax paperworkIn a Chapter 7 bankruptcy filing, you can discharge certain debts in exchange for the sale of non-exempt property. As a general rule, domestic support obligations, such as child support and spousal support, are not dischargeable, and student loan payments are only rarely dischargeable in cases of undue hardship. The common perception is that tax debts may not be discharged in Chapter 7, but this is not entirely true.

The Discharge of Tax Debts in Chapter 7

Certain types of tax obligations may not be discharged under any circumstances. These include taxes which a debtor is required to collect and submit to the taxing authority, such as excise or sales taxes and money withheld an employee’s pay for taxes or Social Security by such as FICA taxes) that was not in fact paid over.

Income taxes and the interest on them (but not tax penalties for failure to file a return or pay a tax) CAN be discharged providing all the following is true:

  • The tax was not incurred as the result of fraud or of willful tax evasion—If the taxing authority can show any instance of intentional evasion or misrepresentation, the tax cannot be discharged.
  • A tax return for the specific tax year or tax period was actually filed. Substitute returns that the IRS or a taxing authority prepares to estimate the tax due do not qualify.
  • The tax return was timely filed, and the last due date to file the return was more than three years before you filed for bankruptcy. Note this is not the date the return was filed, but the date was last due. Thus, if due to extensions the return was due by October 30 but you filed on September 30, the three year look-back runs from October 30.
  • If the return was filed late, it was filed more than two years before your bankruptcy filing.
  • If the taxing authority issued an assessment of tax liability, that was more than 240 days (plus certain additional time for various reasons) prior to your bankruptcy filing.

Even if your personal liability for a tax is dischargeable, there may be tax liens filed that will survive a bankruptcy unless something is done about them. These liens attach to your property. More about them in a later blog post.

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

We understand the stress, anxiety and confusion that can be associated with a potential bankruptcy filing. We offer a free initial consultation to every client. For an appointment, 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

ing a Chapter 7 Bankruptcy Filing to Keep Your Home

House and calculatorIf you are facing financial challenges, you may be considering filing for personal bankruptcy protection. If you want to keep your home, though, you may be uncertain whether you should file a Chapter 7 or a Chapter 13 petition. While a Chapter 13 is, in most instances, the best approach for restructuring your debt and keeping your residence, there are some instances in which you can use a Chapter 7 petition to protect your home.

The Exemption on the Equity in Your Home

In a Chapter 7 bankruptcy proceeding, a bankruptcy trustee is empowered to sell certain nonexempt assets in exchange for your receiving a permanent discharge of most debts. As part of your “fresh start” in bankruptcy you are allowed to keep for yourself certain assets up to permitted values. (In New Jersey bankruptcies, the federal bankruptcy exemptions are available and are almost always the ones selected by debtors). The trustee looks at a hypothetical sale to calculate what amount of money if any will be available after selling the home, paying the broker and other costs of sale, paying off any mortgages and unpaid real estate taxes, paying his own commission, and paying you the amount you have claimed as exempt. The remaining money for creditors is the “non-exempt equity”.

If there is nothing left for creditors, the trustee will “abandon” the residence by a Notice in the Bankruptcy Court. This abandonment is good for debtors. It means that the trustee is giving them back the property as being of no value to the Trustee.

This is the goal most debtors have. To achieve it, having some reliable proof of value to provide the trustee (and for you to know what the home is really worth) is essential. Just as important, however, is to have a current statement showing the balance due on each mortgage. An experienced and qualified bankruptcy attorney will know how to determine if your home is at risk and to help you protect it if a bankruptcy is needed.

In Chapter 7, another option if the home has too much value, may be to “redeem” the home by paying the trustee, from family loans, retirement funds, or other monies that the trustee has no right to. The amount the trustee will accept will be based, usually, on what would be left in a sale by the trustee.

In these situations, however, a Chapter 13 filing may be the better option. There, you can pay creditors the “equity” they would have gotten from a Chapter 7 trustee by payments over 3 to 5 years. The details of this and which is the better option are too complicated for discussion here. These are matters to take up with an experienced and qualified bankruptcy attorney.

You can still lose your home to foreclosure, even if the Chapter 7 trustee concludes he or she doesn’t want to sell it. The trustee may give up his claim to it, but the mortgage lender can still foreclosure, either after you receive a discharge or after the lender gets an order for “stay relief”. In these situations, Chapter 13 may be the better option. In Chapter 13, you can bring the mortgage current through an approved plan. An option if you want to keep your home is to obtain a personal loan or use retirement funds (which are exempt from bankruptcy) to pay the trustee the amount that would have been received in a sale of the house on the open market.

For many people who are struggling to pay their bills including their mortgage, a Chapter 7 bankruptcy can help them keep their home by freeing them from the burden of paying credit cards or other debts so that more of their available money is left to pay a mortgage.

All these considerations are heavily dependent on the facts of your individual situation. Getting early advice from a qualified and experienced bankruptcy attorney is essential. Early planning can make all the difference in the world.

Contact Our Office

At Neuner & Ventura, LLP, we work hard to alleviate the stress, anxiety and confusion 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 us at 856-596-2828 or send us an e-mail. Evening and weekend appointments are available upon request.

Representing Clients Across South and Central 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

US Supreme Court holds that inherited IRA’s are not “retirement funds” that can be exempted in bankruptcy, but New Jersey residents may have other protections

We previously reported that the Seventh Circuit Court of Appeals held that inherited IRA’s were not protected by the Bankruptcy Code’s IRA exemption. The Supreme Court agreed, in a ruling issued June 12, 2014. Clark v Rameker. This means that debtors in bankruptcy cannot count on being able to keep such IRA’s under the federal IRA exemption, 11 USC 522(b)(3)(C). However, debtors who live in New Jersey may still be able to rely on a separate statute that removes IRA’s from a bankruptcy estate. NJSA 25:2-1(b). Because that statute has broader wording than the federal exemption statute, it may shelter inherited IRA’s. But in view of the Supreme Court’s decision, there may be some open questions here.

In Rameker, the Debtor’s mother named Mrs. Clark the beneficiary of an IRA. Under the applicable tax code sections, 26 USC 408 and 408A, the Debtor could either take the IRA funds outright, or roll them over into an “inherited IRA”. Unlike regular IRA’s, the money in these IRA’s can be taken out any time without penalty, and no additional money can be put into them. The Trustee objected to Mrs. Clark’s claim of the entire inherited IRA as exempt, and the exemption was overruled by the 7th Circuit. The Supreme Court agreed, finding that as Congress wrote the exemption, it applied only to “retirement funds”, which, it found, inherited IRA’s were not. The critical distinction was the ability to pull the funds out at any time and to use them for any purpose as well as the inability to add to the account. Funds in an inherited IRA, it found, “constitute ‘a pot of money that can be freely used for current consumption’”

Bad news outside of New Jersey. But New Jersey passed a law intended to shelter “any property held in a qualifying trust and any distributions from a qualifying trust, regardless of the distribution plan elected for the qualifying trust” NJSA 25:2-1(b). A qualifying trust is defined as “a trust created or qualified and maintained pursuant to federal law, including, but not limited to, section 401, 403, 408, 408A, 409, 529 or 530 of the federal Internal Revenue Code of 1986″ Id. There is no reference to retirement funds. And such property or distributions are “exempt from all claims of creditors and shall be excluded from an estate in bankruptcy, subject to certain exceptions.

Does this state law supercede contrary limitations in the Bankruptcy Code? The Third Circuit Court of Appeals held it did in In re Yuhas, 104 F.3d 612 (3d Cir 1997), cert denied, 521 U.S. 1105 (1997). For now at least, that would seem to answer the question.

But if someone were to push the issue, we wonder whether the New Jersey exclusion would withstand further scrutiny by the Supreme Court. States are given only limited powers in bankruptcy matters. They are allowed to “opt out” of the Bankruptcy Code’s exemption scheme and craft their own exemptions in bankruptcy. New Jersey has not done that. So how can New Jersey declare that a broad range of assets are “exempt”?

Moreover, New Jersey has purported to “exclude” these “qualified trusts” from an estate in bankruptcy. The Bankruptcy Code treats certain types of assets, whether or not an exemption is available, as “excluded” from a bankruptcy estate. 11 USC 541(c)(2). Examples are ERISA qualified pensions, and assets in valid spendthrift trusts.  One can argue that New Jersey’s attempt to re-write this section of the Bankruptcy Code falls afoul of the Constitution’s mandate that bankruptcy laws be the sole province of federal law, and for that reason is invalid. But the counter-argument is that New Jersey law determines what is a valid trust Bankruptcy Code section 541(c)(2) excludes from the bankruptcy estate.  If NJSA 25:2-1(b) is seen as declaring all such “qualified trusts” to have the same protections as otherwise valid “spendthrift trusts” (ie those created with a provision that no part of the trust can be levied, pledged, or encumbered), the validity of the statute could stand unimpeded.

For now, attentive bankruptcy practitioners, especially outside New Jersey, need counsel their clients accordingly.


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.

Bankruptcy and Inheritance

Inherited Property and Bankruptcy

What are the potential implications if you found yourself struggling to meet your financial responsibilities and successfully discharged debts through a Chapter 7 proceeding only to find some months later that you are receiving money or property from someone who has died? Is the money yours free and clear? Will you be required to give some or all of it to the bankruptcy court to be distributed to your creditors? The answers can be complicated, but here are some general rules.

The Treatment of an Inheritance after the Completion of a Bankruptcy Filing

If you filed a Chapter 13 bankruptcy you become entitled to receive life insurance money or other money or assets from someone who has died before the three-to-five year period of repayment is over, you must disclose what has happened and may have to turn over any proceeds unless you can demonstrate to the bankruptcy truste that those assets are exempt or some other exception applies. As a result, your plan payments may end up being modified, or you may have to contribute the unprotected portion of what you inherited to pay debts through your bankruptcy plan.

If, on the other hand, you filed for protection under Chapter 7, whether or not you must turn over inherited assets, life insurance proceeds or other inherited funds depends on how much time has elapsed since you filed for bankruptcy. If the person you are inheriting from died within 180 days of your filing, and if you are receiving the money outright, it will generally be considered part of the bankruptcy estate, and must be disclosed. (There are or may be exceptions for money or assets that you inherit through a valid trust). Accordingly, the bankruptcy trustee can use it to pay your creditors, unless you can claim it as exempt. Any portion of the inheritance that cannot be exempted will be used to pay creditors. But an inheritance that you receive more than 180 days after a Chapter 7 filing will not be part of the Chapter 7 bankruptcy estate.

If this situation happens to you, you should promptly seek qualified legal advice as soon as you know you are receiving money or property because someone has died. With the right advice and planning, you will be guided to do the right thing and make use of whatever rights or tools are available to you.

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

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