Chapter 4 Do You Have to Use Chapter 13?

• Library: Chapter 13 Bankruptcy (Nolo) (2020 Ed.)

CHAPTER 4: Do You Have to Use Chapter 13?

What Is the Means Test?

The Means Test

Are You Exempt From Taking the Means Test?

Chapter 7 Statement of Your Current Monthly Income (Form 122A-1)

Chapter 7 Means Test Calculation (Form 122A-2)

Classifying Your Debts

Forced Conversion to Chapter 13

In October 2005, a massive change took place in the bankruptcy field. Believing that too many people were taking advantage of Chapter 7 bankruptcy to wipe out their debts, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). The purpose of the law was to force people who could afford to repay some of their debt to file for bankruptcy under Chapter 13 instead, making it harder and more expensive to file under Chapter 7. Because of the changes, some debtors don't have the option of using Chapter 7: If they want to file for bankruptcy, they have to use Chapter 13. However, some people still have a choice. This chapter will help you figure out whether you have to use Chapter 13 or whether Chapter 7 is an option for you.

CAUTION

Don't skip this chapter, even if you know you will use Chapter 13. Even if you have already decided to file for Chapter 13, make sure to read the instructions for Parts I, II, and III under "The Means Test," below. This information will help you compute your current monthly income and compare that figure to your state's median income. You will need these numbers to figure out the requirements of your repayment plan in Ch. 5.

What Is the Means Test?

Two income tests determine whether you are eligible for Chapter 7 bankruptcy:

• The means test. Debtors whose average household income over the previous six months exceeds the median income in their state for a family of the same size must take this test. These debtors must answer a series of questions about their income and expenses to determine whether they have enough extra income to fund a Chapter 13 plan. If they do, their Chapter 7 filing will be labeled a presumed "abuse" and they will be forced out of Chapter 7.
• The "abuse under all the circumstances" test. This test compares your actual income to your actual expenses to determine whether you have enough money coming in to repay some of your debts. Even if you pass the means test, you can be forced out of Chapter 7 if, under this test, you appear to be able to fund a Chapter 13 repayment plan.

If you fail the means test, you are presumed to be abusing the bankruptcy laws and will be forced into a Chapter 13 bankruptcy unless you can prove that the law shouldn't apply to you for some reason. You'll fail the "abuse under all the circumstances" test if the Office of the U.S. Trustee—the government agency responsible for policing the bankruptcy system—can prove that you are ineligible for Chapter 7 because you used inappropriate figures in your means test calculation.

The only way to know whether your income is too high is to complete one or both of the means test forms that Chapter 7 debtors complete to determine qualification. These are Form 122A-1, Chapter 7 Statement of Your Current Monthly Income and Form 122A-2, Chapter 7 Means Test Calculation. (A third form helps you determine whether you're exempt from the means test altogether—more below.)

The calculations on the first form determine whether your gross income for the previous six months is more or less than the median income for your state for your household size. You'll double the six-month amount before comparing it to the state yearly median income.

If your income is less than your state's median income. If your income (not including Social Security) is less than your state's median, you pass the means test and won't be presumed ineligible to use Chapter 7. You can file, but you might face another hurdle. If your income and expense schedules show that you're left with enough money to repay a reasonable portion of your debt over five years, the means test will alert the court to the fact that your use of Chapter 7 might be an abuse. If the court agrees, you'll have to use Chapter 13.

Whether you choose to use Chapter 13 or are required to, you will have two advantages if your income is less than the state median: You can propose a three-year repayment plan rather than a five-year plan, and you'll use your actual expenses—not amounts approved by the IRS—to calculate how much disposable income you will have left to devote to your plan.

What Is Abuse Under All the Circumstances?

Generally, there are two situations in which the court is likely to find an abuse: if it looks like your income will be higher than you reported, or if your expenses are actually lower than the figures you used in the means test.

For example, the court might find an abuse under all the circumstances if it looks like you will have significant extra income in the future that didn't show up in the means test. (The means test looks only at your income in the six months before you file for bankruptcy.) If your spouse just landed a high-paying job in the last month the court might push you into Chapter 13 if it appears you have enough extra income to pay a significant portion of your unsecured, nonpriority debt over the next five years.

The court might also find an abuse if your expenses look extravagant or if it appears that you could spend less for the same necessities. For example, if you are making large payments on a home or a luxury car, the court might decide that some of that money should be going toward debt repayment.

If your income is more than your state's median income. If your income exceeds the state median, you must complete Form 122A-2. This portion of the test determines whether your expenses will allow you to use Chapter 7 or if you will have to use Chapter 13.

If, after subtracting certain expenses and deductions, you have enough income left over to pay a portion of your unsecured debts (credit card debts, medical bills, and the like) over a five-year period, you'll have to use Chapter 13.

The Means Test

SKIP AHEAD

Those who initially filed for Chapter 7 bankruptcy can skip ahead. If you are using Chapter 13 because you already know you can't pass the means test, or if the court has converted your case to Chapter 13, skip to "Forced Conversion to Chapter 13," below.

Pull up Official Forms 122A-1, 122A-1 Supp, and 122A-2 from www.uscourts.gov/forms/bankruptcy-forms if you'd like to fill them out online as you go along. Or use the blank forms in Appendix B and fill in the numbers by hand.

Getting the Official Bankruptcy Forms

Getting the most up-to-date forms required by the bankruptcy courts is easy. All the forms are on the website of the United States Courts at www.uscourts.gov/forms/bankruptcy-forms. You can complete the forms online, download them, and print them at your convenience. Or, print out blank forms and review them while reading this book.

Many local bankruptcy courts require additional forms, called local forms. You can get these from your local bankruptcy clerk's office or download them from the court's website.

Are You Exempt From Taking the Means Test?

You don't have to take the means test if any of these situations apply to you:

• Your debts are primarily business or nonconsumer debts (explained below).
• You are a disabled veteran.
• You are or have been a military reservist or a member of the National Guard (and meet all requirements).

Instead, on Form 122A-1 Supp, Statement of Exemption from Presumption of Abuse Under §707(b)(2), you'll verify that you qualify for an exemption from the means test.

Part 1. Identify the Kind of Debts You Have

Line 1. Here you tell the court which types of debts you have—consumer or non-consumer debts. Most filer's debts are consumer in nature and meet the definition of being "incurred by an individual primarily for a personal, family, or household purpose." If your debts are predominately consumer obligations, check the "Yes" box. You'll move to the next section.

However, if the majority of your debts are "non-consumer" debts, check the "No" box. Most of your debts will come from running a business, or otherwise qualify as non-consumer debts (more below). You don't have to take the means test and are free to choose between Chapter 7 and Chapter 13 bankruptcy.

You might be surprised at how the law categorizes consumer and non-consumer debts. While business debts clearly fall under the definition of non-consumer debt, this category also includes debts for which there is no profit motive in incurring them. Here are some guidelines:

• Back taxes (including unpaid personal income taxes) are considered to be non-consumer debts even if you don't own a business.
• Mortgage debt on a rental home is considered to be non-consumer debt.
• In some areas medical debts and damages resulting from accidents are non-consumer debts.
• Your mortgage on your personal residence or your vacation home is considered to be a consumer debt, and often, this tips the scale, making your consumer debt outweigh your non-consumer debt.
• Courts are not in agreement on the treatment of student loans. Some courts have found them to be consumer debts while others have classified them as non-consumer debts.

If you are unsure about how to classify your debt, check with an experienced bankruptcy lawyer who is familiar with the law in your area.

If you were able to check the "No" box, you are done with Form 122A-1 Supp. You can move to Form 122A-1 and check Box 1 at the top to indicate that there is no presumption of abuse. If you must check the "Yes" box because your debts are primarily consumer debts, move on to Part 2 of the form.

Part 2. Determine Whether the Military Service Provisions Apply to You

Line 2. To qualify as a disabled veteran for purposes of bankruptcy, you must qualify for disability compensation at a 30% disability rating or higher, or you must have been discharged or released from active duty as a result of a disability incurred or aggravated in the line of duty. If you meet...