Another purported financial professional has confidently and conclusively gotten the bankruptcy means test absolutely dead wrong.

And used that wrong conclusion to steer someone away from bankruptcy.

Mt. St. Helens has nothing on me in terms of venting.

How can financial professionals get this so wrong, more than a decade after the means test was enacted?

Mangling the law

It started off innocently enough when a reader asked financial columnist Jane McNamara on FoxBusiness about the impact of settling an old debt  versus filing bankruptcy.

She noted the possible tax consequences of a settlement and asked whether the money was really available to fund the settlement.

So far, so good.

But then she blew it, big time.

To qualify for a Chapter 7 filing in most cases your income must be lower than the median income for your state

Wrong, wrong, wrong.

An income over the median income for your state just means you have to complete the means test.  It’s largely another form requiring more figures about your income and your projected expenses.

The means test is another hoop to jump through.  It is not a barricade.

The vast majority of above median income debtors pass the means test and successfully file Chapter 7.

In my view, this misstatement is unforgivable.  If you hold yourself out to offer financial advice, you at least should have mastered the basics.

Then you wonder about the independence of the piece when you note a connection to creditcards.com. Who benefits if cardholders don’t file bankruptcy? Card issuers.

Bankruptcy means test in the real world

The man in my office recently made me worry about the means test.

Because passing the means test often relies on deducting certain living expenses from their income such as payments on back taxes and secured debts, this man appeared exposed.

His car was paid for, he had no dependents, he rented, paid his taxes, and had no toys bought on credit.  All of the usual deductions that get people with high incomes through the means test and into bankruptcy were missing.

But it didn’t matter.

Even with an annual income of $7000 above the median California income for a single person, he qualified for Chapter 7, just based on the standard expense allowances provided for in the means test.  In fact, he qualified with $650 a month cushion.

The means test wasn’t even close to knocking him out of bankruptcy.

He’s living proof that McNamara’s statement that you have to have a below median income to file bankruptcy is just plain wrong.

Just because someone wrote it

The internet is marvelous for making information easily available.  But just because it’s in print, it isn’t necessarily correct.

Unfortunately, lots of people will read the FoxBusiness article and conclude that they aren’t eligible for bankruptcy.

They’ll struggle on unnecessarily at financial and personal cost because some writer got it wrong, and they believed.

You can read more about how the means test in bankruptcy really works here:

• How the means test works
• Above median income families and the means test
• Tale of terror caused by bad bankruptcy advice
• 3 Steps to a Fresh Start

Image courtesy of Wikimedia and USGS

You can get a pass on the means test without claiming your dog ate your homework. 

If your debt is not “primarily consumer debt”,  you don’t have to pass the means test to file bankruptcy.

So, you need to total up the consumer debt you have and compare it to the rest of your debts.

Don’t miss the fact that tort claims aren’t  “consumer debts” under the means test.

So if tort judgments or even unliquidated tort claims total more than your consumer debt, you don’t have to take the means test.

Check the box, and come on in and file the bankruptcy chapter of your choice.

Tort explained

Let’s start by defining a “tort”.  A tort is a civil wrong, other than a breach of contract, that causes injury or damage to another without excuse.

Automobile accidents make up the largest group of torts.  The law requires everyone to conduct themselves so that others are not hurt.  One who negligently fails to use appropriate care such that someone else is hurt has committed a tort.

Whereas people choose to enter into contracts, and the contract can specify the remedy if one breaches the contract, tort liability is imposed by law.

It is that imposition of liability that courts have looked to in finding that tort damages are not consumer debts for the purposes of bankruptcy law.

Means test controls access to bankruptcy

Virtually everyone who comes into my office has heard about, and obsesses over, the means test.

Often they assume that merely making more than the median income disqualifies them from bankruptcy relief.

I remind even bankruptcy lawyers that debt incurred for business or investment purposes and tax debt is not “consumer debt”.  If non-consumer debt predominates,  the means test does not apply.

Now, the logic of giving a pass in bankruptcy to those who don’t pay their taxes eludes me, but that’s Congress for you.

Not consumer debt

But there is a little discussed additional category of debt that is not debt “incurred for personal, family or household” purposes (§ 101(8)) :  tort claims.  The reported cases hold that these sorts of debts aren’t incurred in the manner of contract debts like credit cards and medical bills.

The client in my office had no contractual debt, other than a tiny student loan.  But the pending lawsuit accused him of harboring a dangerous dog.

Now mind you, the dog didn’t weigh 5 pounds and the wound it inflicted was objectively insignificant.  The suit, nonetheless, was expensive to defend, stressful, and could blight an otherwise sound financial life.

The bankruptcy case became just that much simpler  when I recognized that we could bypass the means test.

Tort claims aren’t consumer debts; since the dog bite claim dominated the client’s list of debts, it became irrelevant how much money the client made.

The best way to ace the means test is to avoid it altogether.

More

Even High Income Families Pass The Means Test

The Problem Even A Good Bankruptcy Lawyer Can’t Fix

Discharging Taxes In Bankruptcy

Image courtesy of Wikimedia Commons.

You can file bankruptcy tomorrow, so long as you don’t currently have a bankruptcy case pending.

When you can get a discharge in that case is a different story.

The Bankruptcy Code limits the frequency of getting a discharge, not the filing and completion of the bankruptcy case.

My friend Gene Melchionne wrote a marvelous piece about the timing of the bankruptcy discharge that conjures up the old high school cheer:  2, 4, 6, 8, who do we appreciate.

The waiting period between cases, if you want a discharge, can be 2 years, 4 years, 6 years or 8 years, depending on what kind of case you filed before and what kind of case you want to file now.

You count those years from the filing of the first case to the filing of the second case.

But, contrary to the usual thinking, the discharge isn’t everything.

Sounds like heresy from a bankruptcy lawyer, doesn’t it,  but let me tell you a couple of stories.

The no discharge Chapter 7

My client had a house with equity, a recent bankruptcy discharge, and a criminal conviction that had him heading to prison, soon.

He faced a future with no income and no way to pay the mortgage.  And at the point he didn’t live in the property, his right to claim a California homestead in the property was in doubt.

But the recent bankruptcy case meant he couldn’t get a discharge in a new Chapter 7 case; and prison wages were not going to support a Chapter 13.

But what we wanted was the automatic stay, the sale of the house, and the homestead paid to the client.

The balance of the equity was beyond saving, on these facts.  We were content to have the balance go to pay toward the restitution judgment.

So, we filed a Chapter 7.  The fact that my client wasn’t eligible for a discharge wasn’t important .  What we needed was a sale managed by the trustee while my client was behind bars and the homestead carved out and paid to the debtor.

No discharge Chapter 13

Much more common than prison-bound debtors are no-discharge Chapter 13 cases.  When they follow hard on a Chapter 7, we sometimes call them Chapter 20 cases:  7 + 13=20.

After BAPCPA’s changes to the bankruptcy code in 2005, the four year rule applies to getting a Chapter 13 discharge after a Chapter 7.  There must be four years between the filing of the 7 and the filing of the 13 in order to get a discharge of your debts in the Chapter 13.

But the discharge isn’t everything.

Pay debts that survived

Often what you need in a Chapter 20 is the automatic stay and time to pay debts that didn’t get discharged in the Chapter 7.  Those debts might be priority taxes, back family support, or even student loans.

It is the payment plan and the predictability that you need, not necessarily the discharge.

Catch up mortgage

Chapter 13 works to give you time and protection to bring a mortgage current.  Because the mortgage is a lien and wasn’t wiped out in the Chapter 7,  failure to get right with the lender will lead to foreclosure.

Liens that survive the discharge

File a Chapter 13, and you’ve got time to get current.

Strip off the worthless lien

While you can’t strip off liens in Chapter 7 unless they impair an exemption, in Chapter 13 you can void an utterly underwater mortgage AND  strip or bifurcate a tax lien.

Two recent 9th Circuit decisions make it clear that it is completion of the Chapter 13 plan, not the discharge, that entitles you to strip a lien, and that the balance on a lien that survived the Chapter 7 doesn’t count for the Chapter 13 debt limits.

When can you file

So, like lots of legal questions, it depends.  It depends on whether you can achieve your goal without getting a discharge.

More

When another bankruptcy case doesn’t protect you

Steps before you meet a bankruptcy lawyer

Why I love Chapter 13

Image courtesy of Flickr and Hichako.