Avoiding the Means Test in Bankruptcy

When Can You Avoid the Means Test in Bankruptcy?

To qualify to discharge your debts under Chapter 7 today, you must typically submit to the “means test,” a formula designed to determine whether you have the resources to repay your creditors rather than simply ridding yourself of the debt. There are, however, certain conditions where you don’t have to take the means test.

The Business Debt Exemption

Referred to by some as the “business debt loophole,” this provision (set forth in Section 707 (b) of the Bankruptcy Code) states that the means test only applies to debtors with “primarily” consumer debt.

Unfortunately, when Congress enacted the new bankruptcy law in 2005, it did not provide a definition for the term “primarily.” As a practical matter, most courts have simply defined that as a simple majority. Accordingly, if more than 50% of your debts were incurred in a business or for business expenses, you don’t have to qualify under the means test.

Furthermore, the rules are not always crystal clear on what constitutes “consumer debt.” Some obligations, such as your mortgage for a primary home, are almost always considered consumer debt. But other real estate may be for your personal use or it may be considered an investment. Additionally, if a car was used exclusively or even primarily for work, it can be exempted from consumer debt. Credit card debt is customarily viewed as consumer debt, unless you can show that the credit card was used to further a business venture. Many courts hold that taxes are not a consumer debt.

The Disabled Veteran Exemption

You can waive the means test if you are a disabled veteran, under certain conditions. Your disability must be rated at least 30%, you must have suffered the injury in the course of your military duty, and you must have been discharged because of the disability.

The Reserve / National Guard Exemption

If you have been a member of the National Guard, or a reserve soldier in any branch of the U.S. military, and you were called up after September 11, 2001, you may seek an exemption from the means test so long as your debt did not predate the period of your service or arise more than 18 months after it ended.

Needless to say, the Means Test is complex and how it applies to you depends on your circumstances. The above discussion is necessarily general and may not exactly apply to you. Seek qualified legal advice.

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.



Discharging Non – Support Debts to an Ex-Spouse

Using Bankruptcy to Discharge “Non-Support” Debts to an Ex-Spouse

In a Chapter 7 bankruptcy, you are allowed to discharge certain debts. “Domestic Support obligations”, e.g. child support, alimony and spousal support cannot be discharged in either a Chapter 7 or Chapter 13 case. But what about “non-support” debts to your ex-spouse, such as your obligation to pay money as part of equitable distribution of property in a marital property agreement or divorce judgment?

In a Chapter 7 case, any debt or obligation incurred as part of a divorce or separation judgment or agreement is not dischargeable, so long as the debt is due or payable to a spouse, former spouse or child. A debt owed to the spouse’s attorney for counsel fees also fits into this category. However, money you owe your own attorney can be discharged.

Frequently, marital agreements will provide that one person will pay or satisfy joint credit card or other debts that are the spouse’s obligation. These provisions can convert what otherwise might be a dischargeable credit card debt (as an example) into a non-dischargeable debt. You can discharge your debt to the credit card lender, but you will still have to pay up to the extent your spouse is also liable on that card.

How are Marital Debts other than Domestic Support Obligations treated under the Chapter 13 “Super Discharge”?

Chapter 13 provides a broader range of relief. Here, only “Domestic Support Obligations” [“DSO’s”] are non-dischargeable. Frequently, this generates disputes in court about whether a particular debt is a DSO or not. Bankruptcy and state family court judges can both make this determination. Labels applied are not conclusive. Courts will also look at the function served by the payment obligation, and other factors.

Note also, that in any Chapter 13 case, you must continue to pay all alimony, spousal support other DSO obligations, and if there are arrears, these must be fully paid through the Plan.

In a Chapter 13 proceeding, non-DSO debts owed to an ex-spouse are considered to be non-priority, unsecured debt, similar to medical bills and credit card obligations. Accordingly, these debts would be pooled with all other unsecured, non-priority debt. When you put together your reorganization plan, the amount that will go toward non-support debt will be based on a number of factors, including:

  • How much you owe on debts that must be paid in full under bankruptcy laws
  • The total amount of unsecured, non-priority debt
  • The length of your plan—anywhere from three to five years
  • The amount of administrative expenses for the bankruptcy
  • How much you can actually afford to pay
  • Requirements of the “Means Test” if applicable

The interplay of divorce and bankruptcy is always complex and requires the advice of an experienced counsel knowledgeable in both areas. At Neuner and Ventura LLP we have substantial experience in both areas. It may be wise for you and your divorce attorney to consult with us early in the divorce process to be guided to the best result possible.

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



Filing bankruptcy? Your bank may freeze your checking account!

Most people filing a bankruptcy have money in one or more bank accounts. Under certain circumstances, and for one bank in particular, a bankruptcy filing could cause the accounts to be frozen by the bank, at least temporarily, despite the protections of the “automatic stay” the prevent creditors for taking control of a debtor’s property after a bankruptcy is filed.

Money in the bank is an asset of a bankruptcy estate which comes under the control of the trustee. But debtors are entitled to exempt a certain dollar amount of that money and keep it. Technically, the exemptions do not receive final approval until at least 30 days after the First Meeting of Creditors is closed, which will not happen for at least 60 days after the bankruptcy is filed.

Most bank loan agreements have provisions allowing the bank to “setoff” a debt in default against money the bank holds. (ie take the money to pay or pay down the debt that is owed). One would think that a bankruptcy filing would make this illegal, but years ago the US Supreme Court said that it was ok for a bank to “administratively freeze” a debtor’s checking or bank account for a short while, as long as the bank acted promptly to get bankruptcy court approval by a motion to lift the automatic stay. Thus, we tell our clients who happen to owe Bank A money to move their money out of that bank before filing bankruptcy.

A few years back, Wells Fargo Bank as a nationwide policy has started a program to check the accounts of any customer who files bankruptcy. If the total amounts on deposit exceeds a certain amount (I am told it is between $3500 and $5000), they immediately freeze the account and notify the trustee. I am told this started because a trustee successfully sued Wells Fargo for letting a debtor empty a bank account after a bankruptcy filing, taking money that was not the debtor’s to keep.

Most, but not all, courts have so far backed Wells Fargo up on this, but the practice is troubling. Supposedly, there is no harm because the trustee will promptly check out the account and authorize a release of the funds if they are properly exempt. Many trustees applaud the practice, citing cases where hidden bank accounts or under-reported account balances were revealed.

For the hapless but honest debtor, the practice can be traumatic. Suddenly, they have no money. Checks may start bouncing (and of course there are the resulting bank fees!). The trustee may be away or slow to react. Or unwilling to release the funds for one reason or another. Meanwhile, many people have automatic payroll deposits into their account. If the account is frozen this money becomes unavailable. Since earnings from personal services post-petition are not estate property, at least in Chapter 7, this means that the bank freeze has unlawfully seized money that the debtor is unquestionably entitled to. What about joint accounts or convenience accounts? In New Jersey, the money in a joint account generally belongs to the account holder that put it there. So does that mean that the non-debtor spouse has his money frozen too? A convenience account is an account where the debtor is the named account holder for someone else, typically an elderly or infirm relative. Same problem.

One bankruptcy court in New York has ruled that the Wells Fargo freeze violates the automatic stay. I am told this is on appeal.

Until the courts can get this right, people filing bankruptcy need to be aware, fully informed and prepared to avoid these problems.



How Chapter 7 Really Works When Reaffirming a Vehicle

Protecting Your Car When You File For Chapter 7 Bankruptcy Protection

If you face insurmountable debt, you can seek to permanently discharge debt by filing for protection under Chapter 7. The bankruptcy laws limit the type of debt that can be discharged, and also require that reaffirm the debt on any cars or vehicles on which there is a lease or purchase loan. If you own a motor vehicle that you want to keep but which is subject to a auto loan or lease (and assuming it does not have such a large amount of equity that it cannot be fully exempted from sale by a trustee) you still have to take certain steps to prevent a repossession after your bankruptcy discharge.

Reaffirming Your Car Loan in a Chapter 7 Proceeding

A reaffirmation is essentially a new agreement to repay the amount owed on your vehicle. To reaffirm a car loan, you will be required to sign an agreement stating that, in exchange for keeping your car, you agree to continue to make the payments on the car and to remain fully liable on the debt. In essence, this agreement takes the loan out of the debts that will be discharged. The bankruptcy court will review the proposed reaffirmation to make certain that the payment is one you can afford, and that having the car payment will not impose an unreasonable hardship on you and your family. If your attorney, acting as an “officer of the court” can certify to the court that the loan or lease is one you can afford based on your income and expenses, approval typically happens as a matter of course. If your attorney cannot do this, the Court will schedule a hearing to question you about the loan and to determine if it will nevertheless approve the loan.

You can also rescind a reaffirmation agreement within 60 days or at any time before your discharge, and return the vehicle without any further obligation.

If you do not agree to reaffirm the loan and offer to do so, the auto lender will have the right to repossess the vehicle even if you are current on payments. Many auto lenders, especially Ford Motor Credit, are vigorous about this. So to avoid the risk of repossession, an offer to reaffirm, and the signing of a reaffirmation agreement when presented, are necessary.

You want to be careful about entering into a reaffirmation agreement. By doing so, you are essentially agreeing that you will remain fully personally liable for all payments or money due under the car loan or lease without the protection of a discharge in bankruptcy. So, for example, if 6 months after your bankruptcy discharge you fall behind on payments and the lender repossesses then sells the car, it can still sue you for any unpaid balance or deficiency. For a lease, if you owe money at the lease end, you will have to pay up.

Of course, you are protected by the automatic stay, and the lender cannot call, write or take legal action to collect car payments from you until your discharge or until it gets an order for “stay relief”. But once this hurdle is crossed, you could lose your car even if you are remaining current on payments.

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



Heading for bankruptcy? Paying your children’s college expenses could create “clawback” headaches for them and their college

Many parents in financial difficulty still place a priority on helping their children with tuition and other college expenses. While this is entirely understandable, parents who pay colleges for their adult children could be creating problems for both their children and the colleges if they later file for bankruptcy protection.

Recent reports in the Wall Street Journal and elsewhere have exposed a growing trend: bankruptcy trustees are suing colleges to “claw back” money paid by parents in bankruptcy. This has led the colleges to seek payment from the students, or to withhold transcripts until the money is repaid. It has even spawn a proposed bill in Congress to prevent bankruptcy trustees from filing such suits.

The underlying legal theory for such “claw-back” suits is not that novel. Trustees have the right and indeed the obligation to pursue getting back money or property that a debtor in bankruptcy has “fraudulently” transferred, so the money can be made available to pay creditors (and to pay the trustee and his attorneys). The payment need not have been done with actual intent to defraud creditors. It is sufficient if it was made without the parent/debtor getting “reasonably equivalent value” in return for what is paid, and if the payment was made at a time the parent was insolvent or unable to pay current or anticipated debts.

In essence, the trustees argue, the parents paying the college education expenses of an adult child are making a gift to that child. Gifts are by definition not made for “reasonably equivalent value”. They take away money that could have been used to pay the parent’s creditors.  Love and affection are not considered “reasonably equivalent value”.

If the parent takes out a loan or co-signs a student loan for the child but all the money goes to the child or her college, the effect is the same. It is still an avoidable gift.

Ironically, if the parent making the payment is required to do so under a divorce settlement incorporated into a divorce decree, the problem disappears. Why? Because the parent has a legal duty to pay that is enforceable by the divorcing spouse, and by making the payment the parent is relieved of part of that obligation. This is no different than when one pays a debt that is owed. The corresponding reduction in debt creates reasonable value in exchange.

Generally, in New Jersey, parents do not have a legal obligation (absent a divorce situation) to support their children after they achieve the age of majority or become “emancipated”.

There are ways around this problem for parents in financial difficulty. One option is to file bankruptcy first, then pay the college expenses out of future income or assets that are protected in bankruptcy (such as pensions or profit sharing plans),  after the bankruptcy is over. But for most people in this situation, they and their children need to have a sober and honest discussion about what is practical and in every one’s best interests in the long run.

Careful planning and advice of qualified professionals is a must. These are difficult decisions and should be thought through carefully as part of a broad based plan for getting a “fresh start”. With years of trustee and bankruptcy experience, we have the ability to help distressed parents sort it all out.



Filing Bankruptcy Without Your Spouse

You may have personal financial issues that you brought into a marriage, or that really have little or nothing to do with your spouse. You can file a petition in bankruptcy without including your spouse, but how the two of you will be treated will depend in part on where you live and what property or debt you have together.

Selling Jointly owned property

In New Jersey, Pennsylvania and most states outside the western United States, Florida and Louisiana “community property” between a husband and wife does not apply. This means that unless a divorce has already been filed when the bankruptcy is filed, any property that titled exclusively to you, as well as your rights and interest in jointly owned property becomes part of your bankruptcy estate.

A bankruptcy will generally not remove the claims or interest of your spouse in jointly owned property. However, if the property has enough equity or value that your interest in it cannot fully be protected by exemptions available to you in bankruptcy, it can be subject to sale.

In New Jersey, even property that is held as “tenants by the entireties” (ie as husband and wife) can be sold by a bankruptcy trustee over the spouse’s objection. If that were to occur, the non-debtor spouse has certain rights and protections. First, the trustee has to show the court that the benefit to creditors from a sale outweighs the harm to the non-debtor spouse. If the value is high enough, this will commonly be the case. Secondly, the spouse is entitled to his/her share of the net proceeds after paying costs of sale and any mortgage or valid secured debt. Third, the spouse can outbid the proposed purchaser to buy out the debtor’s interest in the property.

This is a situation that absolutely requires careful consideration and advice from an experienced, knowledgeable bankruptcy attorney.

No Discharge of Joint Debt

If you do file for protection under Chapter 7 without your spouse, any discharge of joint debts will only affect your obligation. Even though your debt is discharged, your spouse will still be required to repay his or her portion.

The flip side of this is that your household income will still have to be used to pay your non-filing spouse’s debts and joint debt. If there is not enough money to do this, a joint bankruptcy filing may be needed.

These are situations that need careful and detailed review by an experienced bankruptcy attorney knowledgeable about both bankruptcy and divorce issues, as well as the process of trustee sales of assets. At Neuner and Ventura LLP, we have that background.

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



The Implications of Bankruptcy for a Cosigner

What is the Potential Impact on a Cosigner if You File a Bankruptcy Petition?

It is fairly common practice, when an applicant doesn’t have sufficient credit history or fails to qualify for a loan, for the lender to extend credit anyway, if a family member or someone else co-signs on a note. What happens, though, when the applicant encounters financial difficulties and chooses to file for bankruptcy protection? What are the implications for the co-signer?

The Effect of Bankruptcy on the Obligations of a Co-Signer

When a debtor files for bankruptcy protection under Chapter 7, there is no protection extended to the co-signer who remains liable to pay the amount due. A Chapter 7 filing will only discharge the obligation of the debtor. The automatic stay of collection efforts does not protect the co-signer from a lawsuit..

There are ways that you can protect a co-signer in a Chapter 7 bankruptcy. First, if the loan is a mortgage or auto loan, you can get or remain current on payments and keep paying. For auto loans or leases (the most common co-signer situation) you can opt to reaffirm the debt (but you have to do this so it is presented to the court before your discharge) This means that you waive the right to discharge that debt and confirm that you accept personal responsibility to pay it after the bankruptcy is final. If you do this and keep making payments on the debt even after the bankruptcy is final, action against the co-debtor is unlikely.

Chapter 13 offers much more protection to co-signers and guarantors on non-business “consumer debt” such as auto loans or leases. In Chapter 13, the automatic stay extends to co-signers and co-debtors under what is known as the “co-debtor stay.” While the stay will end when the Chapter 13 period expires, your co-signer will have protection for the three-to-five year term of the Chapter 13 reorganization.

A creditor may seek to have the stay lifted with respect to a co-signer under limited circumstances, including :

  • A determination that it was the co-signer who actually received the benefit of the debt
  • The creditor will suffer “irreparable harm” if the stay is not lifted
  • The Chapter 13 plan does not call for payment in full by the end of the reorganization period

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



The Simplest Chapter 7 Bankruptcy Filing

For many, simply the word “bankruptcy” conjures up visions of mountains of paperwork, complex filings, meetings with creditors and hearings in bankruptcy court. After the 2005 revisions to the bankruptcy laws, with the mandate that anyone seeking to permanently discharge debt under Chapter 7 submit to a “means test,” it may seem that the days of a “simple bankruptcy” are over. You may have to determine which debts qualify for discharge, as well as what assets are exempt from sale under state or federal laws.

Nonetheless, in our experience there are few situations where you cannot achieve some form of relief. Properly handled with experienced and careful guidance, there should be no reason a person in financial difficulty could not quickly and effectively complete a Chapter 7 bankruptcy, and get a fresh financial start. Difficulties are often caused by careless or inexperienced attorneys, or by debtors who are not truthful and candid with their chosen bankruptcy counsel. That said, even if the process takes longer than expected, you will benefit from the automatic stay, which goes into effect immediately, preventing creditors from calling, writing or taking legal action to collect a debt.

Here are the conditions that will make it easiest for you to file and complete a bankruptcy with little or no difficulty:

  • Your household income is less than the state median—Typically, if your income is below state median, you are free to file either Chapter 7 or Chapter 13, and do not need to undergo the complex calculations set forth in the means test.
  • You own little or no assets—If you have significant assets, you will have to determine what assets you can keep and which may be sold to satisfy your creditors. If you have few assets, chances are good you will be able to keep everything.
  • You have complicated or unusual secured debt (mortgage, car note or any obligation secured by collateral.
  • Your creditors have no basis for an allegation of fraud or other wrongdoing against you—such claims, including allegations of fraud happen rarely, but when they do, they take a long time to resolve.
  • You are not the owner of a business or active investment.
  • You have not repaid family members in the past year, or sold or transferred property of substantial value for less than it was worth.

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



Non-Business Exemptions from the Means Test

Exemptions from the Bankruptcy Means Test

Under the substantial revisions to the federal bankruptcy laws in 2005, Congress changed consumer eligibility for discharge of debt under Chapter 7, requiring that applicants qualify by passing a “means test.” The means test looks at income and debt, and disregards your claimed actual current income and expenses in determining whether the you have the “means” to pay creditors. Instead the “Means Test” applies a formula based on what the IRS uses in calculating what payments it will accept for repayment of unpaid taxes. If the formula shows a calculated ability to pay creditors in excess of a certain monthly amount, you are then ineligible for Chapter 7 and instead must repay creditors over a three-to-five-year period, with the minimum repayment being calculated under a variation of the Chapter 7 Means Test formula.

This can be a real problem where your actual expenses do not leave you with enough left over income to pay the calculated minimum payment.

There are some instances where the means test will not apply. For example, if the majority of your obligations (including taxes and mortgage debt) are “non-consumer” debts arising from or incurred in a business or investment, you don’t have to submit to the means test. In addition, you may be able to sidestep the means test if:

  • You are a disabled veteran whose obligations arose mostly when you were on active duty or were engaged in any activity related to or promoting homeland security or defense. The bankruptcy rules require that your disability be rated at 30% or higher, and that you have been discharged because of your disability. In addition, your disability must have been sustained in the line of duty.
  • You are in the military reserve or a member of the National Guard, and you were called to active duty after September 11, 2001. You must have been on active duty or involved in a homeland defense activity for 90 days or more. If you qualify, you will be exempt from a means test while on active duty and for 540 days after discharge.

The Means Test is a complication that is not always easy to apply. Yet careful planning—and in some cases, proper timing—can make a huge difference. This is an area where early planning and advice from a qualified and experienced bankruptcy lawyer are critical.

Contact Our Office

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

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



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



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