Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

When You Can’t Pay Your Bills Because Of The Virus

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virus and money

 

The coronavirus has us locked at home where the  worry demons play unrestrained in our heads.

Money troubles cause us worry, in “good” times.  These are hardly good times.

As more and more of us are hit with shelter-in-place orders that keep us from work and our kids from school, we have even more time to worry about money.

And worry is debilitating.  In normal times, stress kills and the stress of COVID-19 dwarfs our usual worries.

I live and practice bankruptcy law in the San Francisco Bay Area: here,  we’ve been subject to social distancing, strategic shutdowns, and now, shelter-in-place orders for longer than most areas.

So here’s what I know and what I expect as a bankruptcy lawyer about the economic spillover from the fight against this virus.

Focus on the here and now

Staying safe and healthy right now is all that really matters.  Set aside issues of paying existing bills and long term commitments.  Those can wait.

Make food, medicine, and mental health your first concern.

If in doubt about your readiness for a jobless stretch, set aside, for the moment, payments on credit cards, medical bills, and student loans.

If possible, consider paying insurance premiums and car loans.

The very crisis that keeps you from your job keeps your creditors from their jobs, too.  While we’re still getting collection calls at my office, like most collector calls, they are toothless.

You are not alone

We see the usual money troubles as unique to ourselves:  shameful, defeating, personal.

Well hello, this time that isn’t so.  (It wasn’t so before, but that’s another rant.)  Millions of people in this country are facing the same situation.

Which is what feeds my expectation that government will craft remedies that mitigate the damage the country faces. And once those remedies start rolling out, we’ll all have opinions about the fairness and the adequacy of the remedy.

That grousing will give us something more to do.

But collectively, we all see the problem.  The problem is shared.  Your financial struggles will not stand out.

The help that’s coming

Lots of ideas are circulating about protecting families financially and pasting the economy back together.

California reopens signups for affordable health insurance

Right now, most of the solid action I see is at the state and local level.  Most pertinent for my clients, California state courts are closed except for the most essential health, safety and criminal issues.  So there’s not even a court available for creditors to sue you in.

For the longer haul, remedies under discussion include

  • Bans on evictions, foreclosures, and utility shutoffs
  • Restrictions on negative credit reporting
  • Mandated extensions of repayment on existing debt
  • Partial or total forgiveness of student loan debt
  • Low cost loans or grants for small businesses
  • Penalty-free late payment of income and employment taxes

Individual companies have offered free or reduced rate internet access; free online books and courses; on line exercise classes; and the list goes on.

Time will tell just what the collective remedies look like.  But, rest assured,  the crisis demands a fix.

And an election upcoming provides a feedback mechanism if the fix is slow, skimpy or spotty.

Law lumbers

In the best of times, legal actions take time.  So there is little immediate danger to you and yours in holding off payment on unsecured debts.  Don’t worry that the legal ax is about to fall if you miss a payment.

Law suits are expensive for the creditor and are typically the last resort of collectors.  Don’t fret that your unpaid bills will find you in court in the short run.  Where I am, the courts are barely open for much at all.

More concerning are the secured creditors with collection options that don’t require a judge’s involvement.  Think car repossessions and non judicial foreclosures.

If you can’t make your car payment, call AND write the lender and tell them how you are affected by the COVID-19 crisis and ask for relief.  I seriously doubt that, at the moment, creditors have a corporate answer to your request, but ask anyway.

And I never count on a phone call alone to make a record, much less make a difference to a creditor corporation.  Send a letter too and keep a copy.

I expect, but have not seen yet, a policy of tolerance on the part of car creditors.  What would they do with a fleet of repossessed cars? We can hope their repo guys are subject to stay at home orders, too.

As to foreclosures, there are glimmers of action to bar foreclosures while we are fighting the virus.  Residential lenders with loans guaranteed through Fannie Mae and Freddie Mac have been ordered to offer borrowers flexibility.  Stay tuned to see how that works out.

If your loan is not Fannie/Freddie, write the lender seeking relief, and stay watchful for developments.  Again, I don’t think lenders want to end up owning gobs of foreclosed homes.

Reach out and band together

It’s ironic that,  in a time when we’re told to practice social distancing, togetherness is critical.  It may be virtual togetherness, but it is good for our individual health and the strength of our communities.  Take care of your neighbors.

Stay strong, healthy, and hopeful.

 

 

 

 

Cutting The Car Loan Down To Size

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The car loan balance was grossly inflated;  my client owed twice the value of  her car, bought just a year ago.

Before bankruptcy “reform”, she could have stripped the loan balance down to what the car was actually worth.  In essence, the old bankruptcy law gave the lender what it would have gotten by repossession.

But not today.

Bankruptcy “reform” of a decade ago prohibits stripping down the loan balance on cars bought in the past 2+years.

What can Chapter 13 bankruptcy do?

Now that bankruptcy “reform” has shielded the car lender from the real world consequences of the car’s depreciation, the choices seem to be pay or surrender the car.

But not so fast.

Here in Silicon Valley we often retort: RTFM.  In a bankruptcy case, it’s read the underlying contract.

When I did, I found thousands of dollars worth of financed “stuff” that even bankruptcy reform didn’t require the buyer to pay in full.

Ride along as we point out all the excess expense that Chapter 13 carves out of the car loan.

The underwater trade-in

It seems that my client had traded in her previous car  when she still owed $9,000 on it.  The trade-in value (at least in this deal) was $5,000.

So the loan for the new wheels included the $4,000 difference between the old loan and the trade-in credit.  In bankruptcy circles, we call that “negative equity”.

The amount needed to pay off the old car, after credit for the trade-in allowance, was added to the price of the new car, in calculating the new car loan.

And thanks to a 9th Circuit decision called Penrod,  the negative equity portion of the car loan wasn’t entitled to protection from strip-down.

So, we’ve wiped out $4000 of the loan balance, or at least booted it out of the “must pay” category of debts in her Chapter 13, to the “maybe they get something” category of general unsecured creditors.

Gap insurance inflates the balance

As I read on, I found $900 worth of “gap insurance”.  This is extra insurance that covers the gap between the insured value of the car and the loan  balance in the early years of the loan.

Even in car loans not larded with all the add ons and extras found in this deal, once you drive the car off the lot, it is worth less than the purchase price and therefore, usually worth less than the balance on the loan.

If you total the car at the first stop light after leaving the dealership, regular insurance pays what the car was worth just before the accident.  Gap insurance will pay you the difference between the car’s insured value and the loan balance.

Without gap insurance, the car buyer gets a check for the car’s value and still owes the car lender.

But in Chapter 13, the car buyer is protected from that liability by bankruptcy law.

So, my client doesn’t need gap insurance, and we’ve reduced the must-pay portion of the loan by $900.

Service contract is extra

Last on the list of extras plumping the balance of the car loan was a $2000 service contract good for 75,000 miles.

My sense is that the terms of a service contract bought from the manufacturer of the car is carefully calculated to be profitable to the manufacturer.

After discussion, the client decided to reject the service contract and pay for repairs as needed.

We reduced the must-pay balance by another $2000.

Calculating the protected balance

When I added up the extras we carved out of the original loan balance, those extras were 30% of the loan amount.

So, we reduced the car lender’s secured claim that just recited the loan balance on its books  by 30% and got the amount of the loan that was really the purchase-money portion of the deal.  That will be paid in full through the Chapter 13 plan, regardless of what the collateral is now worth.

The car lender still gets a better deal in bankruptcy than it would if they repoed the car in the real world, but then, the car creditors had crafty lobbyists when bankruptcy “reform” was enacted.

Wait, there’s more

We aren’t done whittling this debt down to size, because Chapter 13 allows us reduce the interest rate paid on car loans to today’s market rate.

My client was paying a bit over 10% per year on the car loan.  In Chapter 13, she’ll pay 4-5%.

The ability to change the interest rate on loans secured by personal property, as opposed to real property, was not changed by bankruptcy amendments of 2005.

And this is just one reason I love Chapter 13.

Image courtesy of Daniel Olnes & Flickr.

Debt Settlement Is A Dud

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debt settlementMaking a deal with your creditors has enormous appeal when you can’t pay all that you owe.

Debt settlement companies count on it.

The pitch for “settling your debts” touches a nerve.  Almost everyone WANTS to pay their debts.

But the truth is :  Debt settlement companies rarely deliver what they promise.

Their pitch shouts that debt settlement is superior to bankruptcy.

It just ain’t so.

All too often, the client of the debt settlement company is exposed to continuing collection calls, lawsuits, plumeting credit scores, and garnishments while the company is attempting to settle the debt.

And in the end, many dollars later,  debt settlement delivers neither a debt free life nor an undamaged credit report.

The appeal of debt settlement

What is it that makes a chancy, drawn out, expensive relationship with one of these debt settlement companies seem attractive to the financially overwhelmed?

I’d suggest:

  • Enrollment  appears to offload the problem on someone working for you
  • High profile media types like Suze Orman and Dave Ramsey badmouth bankruptcy
  • Promoters suggest that there is a “secret” to settling your debt for pennies on the dollar
  • Paying some part of debt is morally satisfying

As long as the public buys the idea that bankruptcy is akin to leprosy, those who, for a fee, offer the secret, non bankruptcy solution get rich.

Settlement company gets theirs first

The truth is that most debt settlement companies get their money upfront.  The first several months of payments don’t go to creditors or to building a settlement kitty, they go to the debt settlement company.

When the consumer figures out that paying the debt settlement people for months on end has not resolved any of the life-sapping incidents that come with being in debt: collection calls, law suits, levies, the debt settlement folks can move on to the next troubled consumer, with money in their pocket.

Bankruptcy works

By contrast, bankruptcy is available for a flat filing fee of around $300 to the court, plus attorneys fees.

It costs the same whether you have modest debt or huge debt.

It is instantly effective to stop collections.

Creditors can’t opt out, like they can with debt settlement.  All creditors are bound by the automatic stay and ultimately by the discharge.

And, the rules are enforced by a judge, with powers of sanctions and even incarceration.

What a bankruptcy judge does

The cherry on the top is that bankruptcy doesn’t generate cancellation of debt income issues. like debt settlement does. By law, debt cancelled in bankruptcy isn’t taxable income.

The long-term tax advantage for homeowners in bankruptcy over debt settlement

Bankruptcy bashes debt, for certain and for all time.

More

Pay off credit cards with no interest

Make no changes til you see a bankruptcy lawyer

What to ask a bankruptcy lawyer before signing up

Image courtesy of derekbruff.

Bankruptcy Discharge Slays IRS Form 1099

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In a duel between a Form 1099 and a bankruptcy discharge, bankruptcy wins every time.

The prize?  no tax on debt discharged in bankruptcy.

So, if you’ve already gotten your discharge, the creditor’s 1099, with your social security number on it, is no threat.

But you do need to file another form to secure the prize.

Bankruptcy is exception to tax

Normally, when an obligation is forgiven, the tax code treats the amount of forgiveness as if it were income.  And income is exposed to tax.

Insolvency is another exception to tax on forgiven debt

But forgiveness in bankruptcy in the first exception to the rule.

Debt forgiven in bankruptcy is not treated as income.

Creditor is clueless

So, if bankruptcy is outside the IRS rule, why are you getting a form 1099?

Because there’s another rule, requiring creditors to report to the IRS, just the way your employer is required to send the IRS your W-2.

And seemingly, the creditor can’t figure out that the reason its claim is worthless is because of the bankruptcy discharge.  So it’s easier for the creditor to just send out Form 1099, and make it your problem.

Fixing the 1099 problem

The solution is simple:  file IRS form 982.

Title 11 is the part of the United States Code on bankruptcy.  Cases are filed under different chapters of that title

Form 982 is your rebuttal to the report that you have taxable income because your debt was forgiven.  Check the very first box on the form claiming the bankruptcy exception.

This debt is excluded from income because of  Discharge of indebtedness in a title 11 case 

The IRS provides a set of instructions for filing  your “get out of tax” form.  Form  982 Instructions.

Other tax consequences of discharge

If you have real property, you may have to reduce your basis in assets by the amount of debt discharged in your bankruptcy.

But thankfully, there is an exception to this rule too:  no reduction in basis is required with respect to your principal residence claimed exempt in your bankruptcy case.  IRC 1017(c).

Tax action plan

So there you have the skinny on form 1099 and your bankruptcy discharge.

Bankruptcy has other tax implications:

Taxes dischargeable in bankruptcy

Unfiled tax years are never dischargeable

Chapter 13 gets an interest-free tax repayment plan

Your accountant needs to know about your bankruptcy

What to do with a flat-wrong 1099

 

Free Bankruptcy Advice: Consider The Source

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big golden dollar symbol with apple. business success

Who gets their legal advice from their adversary?

My client did.

Get your legal advice from your adversary, your brother in law, or the internet and be prepared to get a surprise.  Often, not a pleasant surprise.

My client insisted that his tenant’s debt to him survived the tenant’s bankruptcy “because it was listed on Schedule G“.

The tenant had “explained” to my client that Schedule G was the list of debts the debtor didn’t seek to discharge.  So, my client continued, he was legally free to collect the back rent from the debtor after bankruptcy.

I had to explain it wasn’t so.

Schedule G is not a list of debts the debtor wants to continue paying on; it’s a list of executory contracts and unexpired leases.  The debtor’s obligation for each of those debts is discharged just as the debts listed on Schedule F.

How reaffirmation works

Reaffirmation is the only way that a dischargeable debt survives the discharge.  Reaffirmation requires a timely written agreement made after the bankruptcy is filed and approved by the bankruptcy judge.

None of that had happened in this case.

Law in the information age

The fund of information in our world is immense, and more accessible with the advent of the internet.

Not all of that information , however, is equally reliable.

The law is often complicated and dependent on the facts.  Information gets stale.  Not all bloggers know what they’re talking about.

I cringe when a client tells me that he’s “researched bankruptcy on the internet“.  Too often, the client’s full of misinformation complicated by erroneous assumptions.

I applaud the proactive consumer. Just take what you read on the internet with a grain of salt.  There’s a reason that lawyers go to school for three years before they can even take the bar exam.

If anything important to you rides on the information you seek, seek out a lawyer for some input.

Free legal advice can be really costly, and the cost of a lawyer to fix the situation is usually far greater than the cost of getting it right the first time.

More

Do it yourself bankruptcy

How to interview a lawyer

What should you pay a lawyer

Are you stuck with your current lawyer

Image:  ©VERSUS studio

Incorporating Your Business Has Surprise Benefit

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fence-145622_1280_optIncorporate to protect yourself from the debts of your  business, shriek the ads.

That’s the theory of incorporation:  create a separate legal entity in the form of the corporation.

Let that entity incur debt and expose itself to other risks.  If it fails, the personal holdings of the owners of the corporation are safe.

But, in the real world, most big ticket debts that a corporation might incur require the guarantee of the owner.

So if both corporation and owner are liable for the business debts, what has incorporation gained you?

You’ll be surprised.

Incorporate to protect the business

Consider the same move, incorporation,  for the opposite reason.

Incorporate to protect the business from the owner’s debts.

A sole proprietor and his business are one and the same in the law.

When the proprietor has a tax problem or there’s a judgment outstanding against him, all of the business cash and assets are exposed to that debt.

The business bank account can be levied for the owner’s back child support or a judgment against the owner for unpaid magazine subscriptions.

Most exemption laws found in state statutes protect some part of a wage earners salary.  The working man needs some part of his paycheck to put food on the table and gas in the car.

But a proprietor isn’t an employee of his business:  he and the business are one.

The debts of the businessman can put his business out of business.

Corporation immune to shareholder debts

It’s a different story if the business is owned and run by a corporation.

The corporation is a legal entity separate from the shareholder.  The shareholder’s creditors can’t take the corporation’s money to satisfy the owner’s debts.

As a shareholder, you don’t have to worry that your personal creditors will garnish the business’s account debtors to collect a personal debt.

The corporation can retain a reserve for its operation without regard to the claims of the shareholder’s creditors.

Get a job

Incorporating the business also allows the business owner to create a distinction between the money necessary to run the business and the money necessary to feed his family.   He can pay himself a salary, and leave the balance of the business assets in the corporation.

His salary is exposed to his debts, but not his livelihood.

State law provides exemptions that protect a portion of the wage earner’s salary from creditors, a protection that a sole proprietor doesn’t get.

So a creditor of the shareholder-employee can garnish the shareholder’s wages, but they only get a fraction of the total paycheck.  Exemption laws protect the balance of the earnings.

Knowledge workers and service businesses incorporate too

It’s not just brick and mortar businesses that can use protection from its owners.

Realtor and consultants who are not incorporated expose their business cash flow to their creditors.

Nothing is quite so devastating as having your clients served with legal process requiring them to pay the sheriff on your debts rather than paying you.  Or close a big transaction as a realtor and have the tax authorities levy your entire commission.

Incorporation is a powerful tool.  Its principal benefit is, however,  just the opposite of the conventional thinking.

Image courtesy of Wikimedia.

Get Annual Credit Report For Free

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free credit report bandWhen is FREE not FREE?

In a world seemingly driven in all matters by credit reports, getting that report for nothing ought to be a good thing,

But the commercial entities beat the federal government to the web address freecreditreport.com.

And they also got a better ad agency that wrote catchy tunes promoting their product, under the guise of free credit report.

But freecreditreport.com provides you a free credit report only if you surrender personal information, wait for it to come by snail-mail  and sign up for a monthly service billed to your credit card.

They bank on you not cancelling that subscription.

Cha ching!

It’s not really free.

Free credit report

The three big credit reporting agencies do provide a no-strings attached credit report  free to everyone, once a year.

Unfortunately, the URL doesn’t mention free, and doesn’t come with a catchy, banjo driven jingle;

Annualcreditreport.com

But it does provide simple, and free, access to your credit file.

The right to know

Federal law enacted in 2003 gives everyone the right to request a free credit report each year from each of the three national credit reporting agencies:  Experian, Equifax, and Transunion.

For nothing (that is: free) you can examine your credit report once every four months, if you request your free report sequentially from the CRA’s.

Repeat after me:  annualcreditreport.com.

What to do if you find errors

The Federal Trade Commission website walks you through how to challenge inaccurate information on your credit report.  They’ve even included a sample dispute letter.

ConsumerHelpCentral.com  sorts out your remedies if the CRA doesn’t correct the information.

Sing the chorus

Here’s the game plan:

  • Click on www.annualcreditreport.com
  • Order a copy of your report from one agency
  • Look for errors and inaccuracies
  • Challenge bad information
  • Mark your calendar for 4 months to order a report from one of the other national CRA’s

Then, how about I offer a free subscription to BankruptcySoapbox to the best jingle submitted for ANNUALCREDITREPORT.COM. 

I talk about credit after bankruptcy at Bankruptcy in Brief and what your credit report should show after bankruptcy discharge.

The Worst Reason To Choose Debt Settlement Over Bankruptcy

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settle or file bankruptcyThe guy with an old debt asked if bankruptcy or debt settlement would cause greater damage to his “credit”.

The money advice columnist gave the right answer to the wrong question.

She got it backwards.

She advised that bankruptcy was more damaging given that the nagging debts were already three years old and would drop off his credit report in four years, whereas bankruptcy would show for seven to ten years from the bankruptcy filing.

Right, assuming that your credit history is the important issue.

But your credit record is a sideshow in life.

Dealing with old debt

I would first challenge the question.

When you look at the alternatives to debts you can’t pay, I think the first concern should be for your balance sheet.

Which of the alternatives makes you better off NOW, not when you want to incur more debt in the future.

For the man writing in about settling a $13,000 debt for $5,000, I would have a series of questions that didn’t center on his ability to get new credit.

  • How old are you?
  • Do you support others?
  • Do you have any emergency savings?
  • How are you doing on retirement savings?
  • Got health insurance?

If he is young, single, and employed with a bit of money in the bank, perhaps paying $5,000 to make eliminate a $13,000 debt is a good deal.

If he’s middle aged, supporting children or aged parents, and living paycheck to paycheck, I would be inclined to suggest there are better uses for $5000.  At the most basic level, put it in an IRA, and your creditors can’t take it.

If he’s approaching retirement and looking at a future of reduced income and with  little need for future credit, chances are that there are crying needs for that $5000 other than dealing with an old debt.

It’s not about the credit score

As you can see,settlement versus  bankruptcy is not just a matter of which impacts your credit record more negatively.

The decision needs to take weigh spending money on old debts when faced with current and future demands on your assets.

It’s all backwards to think that protecting your credit record is the central issue..

More

Credit heals

Better to keep paying or file bankruptcy

Shore up your defenses against debt collectors

Image courtesy of Flickr and Luke Montague. 

 

 

 

Speak Fluent Bankruptcy

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bankruptcy terms

Bankruptcy has its own language.  If you are considering filing bankruptcy, it helps to know the language spoken there.

Master just a couple of words and phrases, and input from a bankruptcy lawyer starts to make sense.

So, in our continuing campaign for better understanding of bankruptcy, here’s a dozen phrases from the language of Bankruptcy for your meeting with a bankruptcy lawyer.

Essential bankruptcy terms

Petition – the first paper filed in a bankruptcy case that initiates the case.  It invokes the automatic stay. 

Automatic stay – an injunction against creditors that halts collection and foreclosure just because the petition has been filed. 

Schedules  = the balance of the papers filed after the petition to flesh out your bankruptcy case.  

Trustee  – the individual appointed by the Department of Justice  to oversee your filing and to represent the interests of creditors as a whole. 

U.S. Trustee – an employee of the Department of Justice who supervises trustees and monitors Chapter 11 cases with no creditors committee

Means test – a form and a formula added to consumer bankruptcy cases supposedly to ferret out bankruptcy filers who are really able to pay creditors without bankruptcy.

Discharge – the court order that makes your dischargeable unsecured debts unenforceable

Dischargeable – debts that may be wiped out in bankruptcy  

Non dischargeable  debts that are excluded from the  discharge by the terms of the Bankruptcy Code.

Reaffirm – an agreement made after filing to waive the discharge as to a particular debt.  Reaffirmation requires court approval  

Transfer  – any act that changes ownership or title to an asset, or creates a lien on an asset.

Post petition – events that happen after the petition for bankruptcy is filed.

Add some numbers to your list

Because bankruptcy is based on the Bankruptcy Code, bankruptcy types tend to use the number of some important statutes as shorthand.

341 – Section 341 requires a first meeting of creditors in every bankruptcy case.  We call that the 341 meeting.

523 –  This is the section that lists the debts that are non-dischargeable.  Several subsections require an affected creditor to prove his debt is non dischargeable.

727 – This section sets out the circumstances when a discharge can be denied altogether.  It can be brought by a creditor or the trustee for the benefit of all creditors.

Bankruptcy chapters come next

Different chapters of the Bankruptcy Code provide for different kinds of bankruptcy cases that may be filed.

Chapter 7  – a liquidation bankruptcy case available to individuals and business entities, but not trusts or estates.

Chapter 13  – a reorganization case for individuals with debts under certain limits.

Chapter 11  – a more complex reorganization case for individuals and business entities without debt limits

Chapter 12  – a simplified reorganization proceeding for family farmers

Use your words

Now that you have a working bankruptcy vocabulary, start talking to a bankruptcy lawyer to find out how these concepts work in real life.

Don’t be afraid to ask questions.  There is no reason why you should immediately understand this very specialized area of law.

Even when you understand the concepts, how those concepts apply to your situation, and how they interact with each other is what’s really important.

Make sure you pick a bankruptcy lawyer willing to take your questions and to deliver answers that you can understand.

More

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What makes a bankruptcy lawyer great

What should bankruptcy cost?

Skip Bankruptcy’s Means Test

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skip means test

The couple was despondent when another bankruptcy attorney told them that, despite $100,000 in old taxes, they couldn’t file Chapter 7.

This fine fellow told them that the means test showed they had $3000 of disposable income per month.  A Chapter 7 would be an abuse of  bankruptcy under the law.

Only Chapter 13 was possible, he said, and the monthly payment would be $3000.  That didn’t seem like any kind of relief from debts.

Only he never apparently considered the gating question:  were their debts were “primarily consumer debts”.

He forgot the gotcha baked into the means test:  it only applies to ***consumers.***

Only consumers have to prove they are worthy of the Chapter 7 discharge.

Folks with primarily business debts or, taxes aren’t subject to the means test.

So, lots of disposable income is not a bar to Chapter 7 when your debts are primarily taxes.

Who takes the means test

So, just why are some above median income families not subject to the means test?

Bankruptcy Code § 707 allows a judge to dismiss a Chapter 7 case  filed by an individual debtor under this chapter whose debts are primarily consumer debts …. if it finds that the granting of relief would be an abuse of the provisions of this chapter.

The means test is the tool for determining whether the debtor is (supposedly) able to pay their debts.

But,  the means test only applies to debtors whose debts are “primarily consumer debts”.

So, we need to know…

What is consumer debt

The Bankruptcy Code defines consumer debt:

 The term “consumer debt” means debt incurred by an individual primarily for a personal, family, or household purpose. § 101(8)

So, the gating question is:  why was the debt “incurred?”

Tort damages aren’t consumer debts either

Obviously, business debt was not incurred for a personal purpose.

Further, taxes are not incurred by choice, say the cases;  taxes are imposed by government.  And therefor, not a consumer debt.

And that’s the rule, even when the taxes are on personal, household income, or property taxes on the family home.

So, if the total of taxes (and other, non-consumer debt) is greater than the balance of the other debt a person owes, their debt is not “primarily” consumer debt.

And the means test ONLY applies to debtors whose debts are primarily consumer debts.

Skip the means test

The couple who were told that they couldn’t file Chapter 7 because of their generous income, in fact, can file Chapter 7 because their debt is overwhelmingly back taxes.

It doesn’t matter that most of their taxes are so old that the tax is dischargeable.

If it’s tax, it isn’t consumer debt.  And they don’t have to take the test.

More

Cheat sheet to pass means test

Discharging taxes

 

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Phone: (650) 694-4700

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