What income do I need to disclose in my bankruptcy?

  • Retirement income
  • Pensions
  • Social security
  • Stock distributions
  • Trust disbursements

Means Test Income

All debtors filing bankruptcy are required to take a “means test” which will determine if they need to file Chapter 7 or Chapter 13 bankruptcy.

For purposes of the means test, the U.S. Bankruptcy Code defines current monthly income as including: “any amount paid by any entity other than the debtor (or in a joint case the debtor and the debtor’s spouse), on a regular basis for the household expenses of the debtor or the debtor’s dependents (and in a joint case the debtor’s spouse if not otherwise a dependent)…” Benefits received under the Social Security Act, payments to victims of war crimes or crimes against humanity on account of their status as victims of such crimes, and payments to victims of international terrorism or domestic terrorism on account of their status as victims of such terrorism are excluded from the means test.  Stimulus payments from the Covid-19 pandemic are also excluded from the means test but could be an asset.

The means test looks back at the past six months of income as defined above. If you file a bankruptcy in January, the past six-month (or look back) period is July through December. It is this six-month period that will determine what your average annual income is. You must compare your average annual income based on the past six-month period to the median average for your state to see if you qualify to file a Chapter 7 bankruptcy. If your income is too high to file a Chapter 7 you may still qualify to file a Chapter 13.

All of it gets listed one way or another:

  • Wages
  • Commissions
  • Bonuses
  • Vacation pay
  • Business income
  • Workers Compensation
  • Unemployment
  • Regular contributions from family
    or housemate
  • Disability

Couples often ask if they should file separate bankruptcy petitions.

“We have our own debts and don’t think we should file
together,“ they say.

California is a community property state

Those debts the couple thinks are separate usually are not. It doesn’t matter if the debts are only in the name of one spouse. Unless the debt was incurred prior to the marriage or the couple had entered into a valid prenuptial agreement, it is a community debt even if it is only in one name. If the debt is in one name and there is a valid pre-nuptial agreement to keep all finances separate then it would be a separate debt. In addition, if there is not enough separate property to pay separate debts the community assets can be reached by creditors.

Filing Jointly

If both spouses need the protection of the bankruptcy court it is usually easier, more efficient and more economical to file jointly. A joint filing will only require one filing fee. Separate filings require each spouse to pay a filing fee.

All these must be listed whether filing jointly or separately:

  • Community assets    
  • Separate assets  
  • Community liabilities
  • Separate liabilities

If the couple files separately, they need to list everything anyway so it may make sense to file one time and list everything together.

Separate Households

If a couple has been separated for a while and set up two distinct households it might be easier to file separately. Sometimes the spouses cannot communicate well and one spouse doesn’t have all the information needed on the other spouse’s income and expenses. In that case it would likely be better to file an individual bankruptcy.

Sometimes spouses don’t want to communicate and feel as though they would rather not go through this process together.

Nothing in the law requires a couple to file jointly. The decision should depend on the specific circumstances of the couple involved.

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Certain accounts can’t be touched during a bankruptcy filing and the 401k is one of them.

Under the bankruptcy code a 401k is not property of the estate and creditors have limited access to it.

The federal government has set up bankruptcy as a way of helping people get back on their feet and recover from financial challenges so it makes sense that retirement funds would be protected. If it was required that people first use up all their retirement funds, these same people would likely require government assistance when they reach retirement age.

Warning If Only One Participant

An exception to retirement plans not included in the estate exists for those that have only one participant, such as single employee corporate plans, and some other plans originating in self-employment. These plans may be property of the estate and may be vulnerable to creditors unless subject to an exemption. Get good professional advice if this describes your retirement plan.

Borrowing Against a 401k

Be careful of borrowing against a 401k plan because outstanding 401k loans can present a problem in bankruptcy. Since they are not considered debts, they are not dischargeable. They are also not considered special circumstances that are deducted when calculating the long form means test. So, while you may have to repay the loan it won’t help your case.

In a Chapter 13, the 401k loan can be repaid as part of the plan.

If you are laid off or switch employers the entire loan balance becomes due and must be paid within 90 days to avoid a tax penalty. Tax penalties on early withdrawals can be steep. There is likely an early withdrawal penalty of 10% plus income tax is withheld at 20%. You can pay this balance with a credit card. If you do it right before filing bankruptcy, you’ll have another problem, as the charge will almost certainly be challenged as abuse.

The important warning is – do not use 401k funds to pay off dischargeable credit card debt.

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The automatic stay is a major advantage to filing for Bankruptcy.

After you file, no one can take any action to collect your debt, enforce a judgment, garnish your wages, levy your bank accounts, take your property or continue with a lawsuit unless they go into federal bankruptcy court and lift the bankruptcy stay. There are some exceptions to this such as the requirement to keep paying child support.

Who lifts the bankruptcy stay?

A mortgage holder or automobile lender might want to lift the bankruptcy stay so they can take some action to pick up a car or foreclose on a mortgage. In order to lift the stay, a motion must first be filed in court and heard by a judge. With this process you need to respond to the motion to get the opportunity to convince the court that the creditor is wrongfully trying to take your property, or you aren’t really behind in your payments, or any other defense you may have to the motion to lift the stay.

Most often happens in a chapter 13 when payments are behind.

This most often happens in a Chapter 13 if you fall behind in your payments to a secured creditor. They want to repossess the automobile or foreclose on the home. If you have been making your payments it is hard for them to do anything. If you haven’t been making your payments they don’t want to wait three to five years for your chapter 13 case to be concluded.

What can you do?

  • You may be able to get extra time to pay or you may be able to restructure your bankruptcy plan payments to catch up. If your requests are reasonable, and it appears that you can follow through, a judge will likely grant them.
  • If you have received a motion to lift the bankruptcy stay, be sure and talk to your attorney about it. You have limited time to respond to the motion and ask for a hearing or the creditor will get what they ask for.
  • You’ll want to examine your situation carefully and decide if a change in plan will work or if there really isn’t a workable option. Maybe you can’t afford to make the payments or keep the property.  It might be time to consider letting that property go.

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The means test is used to determine eligibility for Title 11 of the
United States Code Chapter 7,
or the plan payments
in a Chapter 13 bankruptcy case.

It was designed to prevent debtors who have sufficient financial means to pay a portion of their debts from liquidating them entirely in a chapter 7 bankruptcy. Creditors pushed for the inclusion of a means test because they wanted to weed out those who could pay something.

During the Great Depression, the test was used to screen applicants for such programs as Home Relief in the United States, and starting in the 1960s, for benefits such as those provided by the Food Stamp Program. In 2005, the United States bankruptcy laws changed by adding a means test to purportedly prevent wealthy debtors from filing for Chapter 7 Bankruptcy. This 2005 BAPCPA change is found in 11 U.S.C. § 707(b).

If you are in the military or have a majority of non-consumer debt you are exempt from the means test income guidelines. Non-consumer debts are mainly those incurred for business or profit purposes, tax debt and tort debt.

Is Your Income Less Than the Median?

Debtors whose income is below the state’s median income pass the means test. To check your median income you must first determine your household size. Gross wages, business income, pension, family support, unemployment, regular gifts and other income is included. Social security payments are not included.

The median annual California incomes as of May 2020 are:

1 person – $62,938

2 persons – $83,435

3 persons – $92,735

4 persons – $106,530

5 persons or more – Add $9,000 for each person in excess of 4.

If your income is below the median you go no farther with the form or the calculations. STOP, you are done. You are eligible to file for chapter 7 bankruptcy and do not need to complete the rest of the form.

What If My Income is Over the Median?

In Marin and surrounding counties, we often see the situation where the income exceeds the median but there is not enough left to make payments to the creditors. In this case the long form of the means tests must be completed. The long form factors in expenses like:

  • Auto payments
  • Mortgage payments
  • Income tax payments
  • Property tax payments
  • Term life insurance costs
  • Health insurance costs
  • Charitable contributions 
  • Child care necessary for work
  • Education costs  
  • Healthcare costs   
  • Union dues
  • Mandatory retirement

Most people who need help find that they pass the means test.

If you pass the means test it means that you can file a chapter 7 bankruptcy. However, just because you can file under chapter 7 doesn’t mean it is the best chapter for you to file under. If you are trying to catch up with mortgage payments, aren’t making your HOA dues payments or have unsecured liens on your property a chapter 13 would likely benefit you more.

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The California Northern Bankruptcy Court is the area
or district that our firm covers.

California has four bankruptcy court districts:

  1. California Central Bankruptcy Court
  2. California Eastern Bankruptcy Court
  3. California Northern Bankruptcy Court, and
  4. California Southern Bankruptcy Court.

Each district is made up of different divisions. Each division has a different court location and different practices and procedures.

People sometimes ask if I will go to a different district so I can take their case. This is something I rarely do because of the additional time it would take me to handle the case. It is usually best for both the potential client and myself, to refer the person to a knowledgeable colleague that works in that district. Not only could I have substantial additional travel time but in most cases I would need to study the local rules and determine what the local customs and practices are.

Isn’t Bankruptcy Law Federal and the Same in Every Court?

While it’s true that the federal law is the same for all bankruptcy courts, it’s equally true that each district has its own specific procedures. Not only that, but each division within a district has its own local rules and practices. California Northern Bankruptcy Court has an Oakland Division, a San Jose Division, a Santa Rosa Division, and a San Francisco Division. Each of these divisions has its own judge(s) and trustees and its own local practices and policies.

What Counties are in the California Northern Bankruptcy Court District?

California Northern Bankruptcy Court encompasses the following:

Oakland Division:

  • Alameda County
  • Contra Costa County
San Francisco Division:

  • San Francisco County 
  • San Mateo County
San Jose Division:

  • San Benito County
  • Santa Clara County
  • Santa Cruz County
  • Monterey County
Santa Rosa Division:

  • Del Norte County
  • Humboldt County
  • Lake County
  • Marin County
  • Mendocino County
  • Napa County
  • Sonoma County

If you are considering filing bankruptcy find out what division and district your prospective attorney is familiar with. It is generally best to choose one who has some experience in the court where you need to file.

Other California Divisions can be found at the United States Ninth Circuit Court Locator.

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Organizing is something that may be hard to do.

When things feel out of control it is normal to try and ignore them.

Many of my clients have been putting their heads in the sand and leave mail unopened and unorganized until they see me.  It can be overwhelming when those bills and collection letters come flooding into your mail box.

The first step to getting a handle on things is to tackle organizing that unopened mail with all those bills and collection letters.  For now, it doesn’t matter what is in there. It could be a mixture of opened mail, unopened mail, opened mail in the envelopes or something else entirely different. Before you can file any chapter 7, or chapter 13 bankruptcy, you need to find and organize all your financial information.

Set aside a block of time to begin, even if it is only a twenty or thirty minute window. Gather up all that paper and find a place to begin to sort it. Ideally, you want somewhere where you can leave the project out as you work on it so that you can return to it until it is completed. Have several grocery bags or boxes nearby. You may want one for trash, one for recycling and one for documents that need to be shredded. Clearly label each bag or box.

Use the steps below to start organizing and get as far as you can in your allotted time. When you are ready, set aside another block of time and continue through the steps. Repeat until complete.

Organizing Mail Steps

  1. Open everything. Use a letter opener or some other tool to make it easier. Toss all the envelopes that the bills and statement arrived in into your recycle bag. That extra outside wrapper is not needed.
  2. If you are unable to pay the bills and are planning to file bankruptcy, or you pay your bills online, you can also toss the return envelopes into that same recycle bag.
  3. Sort everything by type –  credit card bills in one pile, medical bills in another pile. Utility bills and ongoing household expenses in another, etc.
  4. Sort each type file by creditor or sender. All PG&E together, all Chase cards together, all hospital bills together and all Aunt Sally’s letters together. Put all Chase collection letters (from agencies and lawyers) with the original Chase bills.
  5. If you have more than one account with a creditor (like two separate Discover card accounts) separate those accounts into different piles.
  6. Organize each creditor pile by date with the most recent on the top.
  7. Finally, place each stack into a file folder and label the folder with the creditor name and the last 4 digits of the account number. In my office we prefer no staples are used because they will only need to be removed before scanning. If you bring us paper, we will scan it and return it to you and staples only slow down the process.
  8. If you’re able it could be useful to scan those documents into electronic PDF files or download them from the creditor’s websites.

Congratulations! Whether you are looking at debt consolidation plans, a bankruptcy or just want to know how much you owe, your bills are now organized and ready to work with.

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Preference sounds good, right? Maybe, maybe not.

If you pay your taxes or court ordered child support before paying other creditors, that’s okay. If you make your house mortgage payment or auto payment before paying your Visa bill, that’s okay. So, what is a preference payment? What can’t I do?

Insider Preference Payments

Friends and relatives are considered to be insiders because they are closer to you than most creditors. Within one year before you file for bankruptcy, you can’t pay your mom back the $2,000 she loaned you before you pay the Visa bill.  It is considered a preference payment and the trustee can have it set aside. In other words, the trustee can sue your mom to recover that $2,000 payment.

Why can they do that? Because it is considered unfair under the U.S. Bankruptcy Code. The code is concerned with fairness to all parties; it is the overarching principle that guides the code. Fairness to you the debtor and to all the creditors that you owe money to.

You can’t make any preferential payment to a friend or family member in the year before filing bankruptcy or the trustee can recover it and will be likely to go after your friend or family member.

In that one-year period before filing for a bankruptcy, be careful of repaying your:

  • Aunt
  • Uncle
  • Sister
  • Brother
  • Brother-in-law
  • Sister-on-law
  • Cousin
  • Niece 
  • Mother
  • Father
  • Any other relative
  • Friend

Your brother would likely be upset to find out that the money you gave him to repay your loan will be taken by the trustee. Either wait to file the bankruptcy so a full year passes, or wait to make the payment until after the bankruptcy case. There is nothing in the law that stops you from paying back a loan after it has been discharged in bankruptcy. As long as you wait, you can repay anyone you want to.

What About Other Creditors?

Any payment over $600 to a credit card company or other creditor (medical provider, personal loan, other loans) within 90 days of filing bankruptcy is also a preference payment that can be set aside. It is considered unfair to pay one creditor but not all of them.

A preference payment doesn’t have to be cash, check or money. It can also be a transfer of your property. For example, you owe your sister some money and she agrees to accept your bicycle in trade. Talk to a knowledgeable local bankruptcy lawyer about your payments. They’ll ask you questions and dig into your facts so you can avoid any unpleasant surprises.

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A Qualified Written Request allows borrowers to obtain servicer information  without filing a lawsuit.

You want to save your house and a foreclosure is looming but you’re pretty certain that the lender is claiming you owe more than you actually do. While not part of the bankruptcy code, 12 U.S.C. 2605 is a tool that may assist a debtor to keep their home with or without a bankruptcy filing.

It is common for a lender or mortgage servicer to claim that you owe more money than you think you do. Sometimes these accounting errors even cause you to default on your loan. Some of the common errors are:

  • Compounding interest when not allowed;
  • Failure to make timely tax payments thus incurring late charges;
  • Failure to properly apply payments made to your account;
  • Improperly crediting payments you make;
  • Charging impermissible late fees;
  • Refusing to accept your payments because there is a difference in balance due and sum paid;
  • Forcing insurance on you when you already have shown proof you carry it.

Send a Qualified Written Request

The Real Estate Settlement Procedures Act (RESPA) provides for the Qualified Written Request (QWR). As Max Gardner says, “a reasonable QWR can provide the attorney for the Chapter 13 debtor with some of the very best discovery outside of a contested case or Adversary Proceeding. ”The servicer must acknowledge your request within 20 work days of receipt and respond to your inquiries within 60 work days. You must include enough information in your request so that the servicer can identify your mortgage account. Usually an account number along with your name and the property address will work. You should also include any errors you believe occurred and clear requests for information.

Ask for a complete transaction history of the loan including all payments and charges. Also ask for the transaction codes and definitions so you can understand the history. You’ll also want any Pooling agreements; the name and contact information of a person to speak with about your account; the name of the current holder of the note; and copies of all correspondence, communication and collection documents related to your account. With this information you will be able to find out what is happening to your account and who owns your mortgage.

What If My Lender Won’t Respond?

There is also a provision in 12 U.S.C. 2605(f) that allows for reasonable attorney fees and costs if the lender or servicer fails to comply with your request.

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A chapter 13 bankruptcy is often called a “reorganization.”

In a reorganization you are allowed to catch up on mortgages or automobile loans over a period of time.

When a bank or other creditor is uncooperative you can force them to work with you by filing a chapter 13 bankruptcy case. As long as you can catch up under the plan you can force the creditor to let you keep the property while you make up the back payments. Depending on your situation you may be able to strip off an unsecured second or third mortgage. There must be no property value securing the loan and you must successfully complete your plan payments.

Chapter 13 cases also allow you to keep non-exempt property. In a chapter 7 you are allowed to keep only exempt property and non-exempt property would be sold for the benefit of the creditors. In the chapter 13, you can keep the non-exempt property if you pay for it over the life of the plan, usually a three to five-year period.

Chapter 13 Eligibility

In order to qualify to file a chapter 13 you must be an individual with regular income and be within certain debt limits. As of the time of this writing, you may not have over $1,184,200 in secured debt (mainly consist of mortgages and car loans) and no more than $394,725 in unsecured debts (generally credit cards, medical bills, student loans, and income taxes). A corporation or partnership may not file a chapter 13.

You may not file a chapter 13 or any other chapter unless you have taken an approved credit counseling course within the preceding 180 days.There are very few emergency exceptions allowed.

You may not file under any chapter if within the preceding 180 days you had a prior bankruptcy petition dismissed due to your willful failure to appear before the court or comply with court orders, or was voluntarily dismissed after creditors sought relief from the bankruptcy court to recover property on which they hold liens.  11 U.S.C. section 109(g), 362(d) and (e).

Chapter 13 Plan

The plan is your description of when creditors will be paid, how much they will be paid and how they will be paid. After you pay your living expenses, the balance of your income goes into plan payments. Creditors can object if not all your disposable income goes into the plan or if they think they are being treated unfairly under the plan terms. The trustee will review your plan and make sure that it meets the legal requirements and that you have enough regular income to fund the plan. The trustee must approve your plan.

Many people make the mistake of waiting for trustee approval to begin making their plan payments. You must begin making these payments within 30 days of filing your bankruptcy case. The trustee will hold your payments until the plan is approved and then begin to pay them out to creditors. If you do not make your plan payments, your case will likely be dismissed.

Your plan can be modified if you lose your job or there are other changes. There is also a provision for a hardship discharge and you may convert your chapter 13 to a chapter 7 at any time.

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