One of the most vexing issues for Chapter 7 Long Island Bankruptcy Lawyers is Section 707 of the Bankruptcy Code which deals with dismissal of a Chapter 7 case or conversion of a Chapter 7 case to Chapters 13 or 11. Under the 2005 Amendments to the Bankruptcy Code, Sections 707(b)(2) and 707(b)(3) became much more potent filters to deny Chapter 7 bankruptcy relief to debtors with incomes that are considered too high under Section 707(b)(2), or where circumstances otherwise are determined to be abusive under Section 707(b)(3). Section 707(b)(2) relies on a complex calculation called “means testing” which goes into effect if the debtor’s gross income over the 6 months preceding the bankruptcy filing exceeds median household income as established by IRS census data which averages household income based on household size in a particular state. Means testing is used in Chapter 7 to determine if a case qualifies for Chapter 7 or whether the case needs to be dismissed or alternatively converted voluntarily by the debtor to Chapter 13. In Chapter 13 debts are not immediately eliminated or discharged, but are reorganized over a five year plan. The means test is also used in Chapter 13 but for a different purpose which is to determine to what extent the debtor can pay their unsecured debt at a percentage on the dollar in a Chapter 13 plan that pays back debt on a pro-rata basis according to the “projected disposable income”.
Long Island Chapter 7 bankruptcy attorneys have been particularly challenged by these changes because the economies of Suffolk County and Nassau County are more similar to the economies of Connecticut and New Jersey, than much of upstate New York. As a consequence, the IRS census numbers establishing a median income for New York State severely disadvantage potential Long Island Chapter 7 debtors. Under the website for the United States Trustee, the median income on or after April 1, 2022 for the following states based on household size is as follows:
Household NYS NJ CT MA MD
1 Person $63,548. $75,321. $72,497. $75,077. $75,214.
2 Person $80,784. $92,669. $94,528. $96,358. $98,840.
3 Person $96,854. $117,697. $108,409. $117,415. $113,994.
4 Person $117,706. $140,657. $137,128. $148,713. $138,054.
[Add $9,000. for each individual in excess of 4].
As should be apparent Long Island Chapter 7 cases are more difficult to sustain in terms of an income challenge than cases for similar household sizes in New Jersey, Connecticut, Massachusetts, and Maryland. The difference for a four person household is approximately $20,000.-$30,000. This initial presumption for the means test, that household incomes should be based on a state median, sets the pattern for the entire means test with IRS averages creating presumptive limits to various spending based on state household size averages.
The means test seems to be comprehensive in considering all income of the debtor in the six months preceding the Chapter 7 filing, except social security. Bankruptcy Long Island Judge Carla E. Craig had decided in In re Coto, 425 B.R. 72 (Bkrtcy.E.D.N.Y 2010) that a wage settlement received during the six months preceding the petition date though unusual and non-recurring was considered income. However, in a Chapter 13 Suffolk County case, In re Jill Susan Mendelson, 412 B.R. 75 (Bankr. E.D.N.Y. March 12, 2009), by Bankruptcy Long Island Judge Robert E. Grossman, it was held that the debtor’s non-reccuring voluntary withdrawal from her qualified retirement savings account did not constitute “projected disposable income” for the purposes of the amount to be paid under a Chapter 13 plan. Using a “forward-looking” or “crystal ball” approach in analyzing Sections 1325(b)(2) and 101(10A) and citing from In re DeThamle, 390 B.R. 716 (Bankr. D. Kan. 2008). The approach of LI Bankruptcy Judge Grossman in Mendelson seems like it may be specific to Chapter 13, but he does not exclude Chapter 7 cases from such approach. However Judge Grossman does cite other courts that have more generally resolved this same issue “by finding that retirement account distributions are not “income” and therefore are not included in “current monthly income” at all. Rather, these courts have found that the income in such situations is realized by the debtor at the time the retirement funds are deposited into the account, not when they are subsequently distributed to the debtor. A distribution from the retirement account under this reasoning, is analogous to a transfer from a debtor’s savings account to his checking account.” See, Zahn vs. Fink (In re Zahn), 391 B.R. 840 (B.A.P. 8th Cir. 2008); Simon vs. Zittel, No. 07-3`616, 2008 WL 750346 (Bankr. S. D. Ill. March 19, 2008); In re Wayman, 351 B.R. 808 (Bankr. E. D. Tex. 2006). Bankruptcy Suffolk County Judge Grossman held in another chapter 13 Long Island case, In re Rafael Almonte, 397 B.R. 659 (Bankr.E.D.N.Y. 2008), based on a similar “forward looking” rather than “snap shot” approach, that the debtor’s credit card cash advances taken by the debtor in the six months prior to the bankruptcy did not constitute “current monthly income” used for the purposes of determining the debtor’s “projected disposable income” under Section 1325(b))1)(B). Based upon the above, there are differences in how decisions have viewed income that should be included in debtor’s six month average for disposable income. The particular court’s past decisions as well as whether the case is in Chapter 7 or Chapter 13 are all factors. For general information about Chapter 7, Chapter 13, and/or Bankruptcy Solutions, in general, please click here.
The Means Test allows for the deduction of certain expenses from the debtor’s income in order to assess whether the debtor impermissibly exceeded the Means Test. For example, improper deductions of income under the case law has been held to be payments made on loan from debtor’s retirement account which cannot be deducted in performing Chapter 7 means test, see In re Egebjerg, 574 F.3d 1045 (9th Circ. 2009). However, rules in Chapter 13 can sometimes vary from those in Chapter 7 and it should be noted that contributions to employer sponsored retirement plans and amounts to pay down 401k loans are deducted in assessing “projected disposable” for Chapter 13. The United StatesSupreme Court resolved a split in the circuits in Ransom v. FIA Card Services N.A., 131 S.Ct. 716, 178 L.Ed.2d 603, 79 USLW 4020 (U.S. Sup. Ct. Jan. 11, 2011) by deciding that a debtor who does not make loan or lease payments may not take the car-ownership deduction in calculating his projected disposable income under the means test. Earlier, in In re Rabener, 424 B.R. 36 (Bkrtcy.E.D.N.Y 2010), a Chapter 7 Suffolk County case by Bankruptcy Judge Robert E. Grossman, came to the same conclusion over a vehicle the debtor owned free and clear. The contractual requirement to pay secured debt such as a mortgage payment is a deductable expense even if the debtor is in arrears; however there has been a difference in decisions where the debtor has intentions to surrender the property or has already vacated the property. See, Lynch vs. Haenke, 395 B.R. 346 (E.D.N.C. 2008) contractual mortgage payments deducted even where debtor’s intentions are to surrender premises. Also, In re Willette, 395 B.R. 308 (Bkrtcy.D.Vt., 2008) where debtor could deduct mortgage expense although the stay had been vacated; court ruled that debtor’s intent and post-petition events were not relevant if on petition date the debtor was contractually liable for the mortgage. But see contrasting decision in In re Thompson, 457 B. R. 872 (Bkrtcy.M.D.Fla., 2011) which decided that mortgage could not be deducted on surrendered property. The view in the Long Island Bankruptcy Court is that it is the contractual obligation to pay the mortgage regardless of the loan status that is determinative.
To the extent a household expense is the non-filing spouse’s sole obligation and is paid solely by the non-filing spouse, it is properly deducted as a marital expense. See, Strum vs. U.S. Trustee, 455 B.R. 130 (N.D. Ohio 2011) where the marital deduction was given to credit cards that were sole obligations and solely paid by non-filing spouse. However, Long Island Bankruptcy Judge Craig in In re Persaud, –B.R.– 2013 WL 427921 (Bkrtcy. E.D.N.Y February 4, 2013) recently decided that where the expense is paid by the non-debtor spouse and is not “purely personal” to the non-debtor spouse it will be considered to be a household expense, such as the payment of the debtor’s dependent children’s tuition by the non-filing spouse, although the expenses where solely paid by the non-debtor spouse who was the only one contractually liable to pay. A differing analysis is found in In re Toxvard, 485 B.R. 23 (Bkrtcy.D.Colo., January 9, 2013) which analyzed two conflicting lines of cases where the non-filing spouse was the only one liable on the mortgage and described one line as “house-centric” which viewed any expense for the household as one that needs to be included in the means test and a “debtor-centric” approach, with which Toxvard agreed which viewed the expense as deductible under the marital deduction if it was not contractually that of the debtor.
The means test in many ways is an awkward and inaccurate measure of the ability of a person to pay their debt. However, the test does have a “special circumstances” exception at the end which may allow a person who otherwise fails the test to argue that they should nonetheless be allowed to file in Chapter 7. New York Bankruptcy Judge Carl L. Bucki, In re Howell, 477 B.R. 314 (Bkrtcy.W.D.N.Y., September 11, 2012) held that the debtor’s non-dischargeable student debt which ate up the debtor’s disposable income was a “special circumstance” sufficient to rebut the means test. But see, In re Thompson, 457 BR 872 (Bkrtcy.M.D.Fla 2011) which decided that the student loan and medical expenses were not a “special circumstance”. Long Island Bankruptcy Judge Craig in In re Coto, 425 B.R. 72 (Bkrtcy.E.D.N.Y 2010) stated “[w]hat constitutes a “special circumstance” is by no means well settled” and citing In re Cribbs, 387 B.R. 324, 329 (Bankr.S.D.Ga. 2008) Judge Craig held that that a wage settlement received during the six months preceding the petition date though unusual and non-recurring was not a “special circumstance” and needed to be included as income. Likewise, a Chapter 7 New York case, , In re Anderson, 444 B.R. 505 (Bkrtcy.W.D.N.Y., 2011) held that age and the desire of a 67 year old debtor to retire shortly was not a special circumstance sufficient to rebut the means test.
Several conflicting tests have been proposed to determine the size of the debtor’s household. One test which seems to be influential with Long Island Chapter 7 trustee’s is the dependency standard of the Internal Revenue Service (IRS) per the debtor’s last tax return. Another test that has been used by bankruptcy courts has been the “heads on the beds” test which evaluates how many persons actually residing in the debtor’s home. The court in In re Ellringer, 370 B.R. 905 (Bankr.D.Minn. 2007) adopted this approach based on the Census Bureau definition which defines “household” as “all of the people, related and unrelated, who occupy a housing unit.” However, the test that seems to be gaining ground is the “single economic unit” test which evaluates if the non-debtor and debtor share household expenses and income. See, In re Morrison 443 B.B. 378 (Bkrtcy.M.D.N.C. 2011) which held that live in boyfriend who assumed the obligation to pay mortgage on house qualified as a household member. The Morrison court identified seven factors for the “economic unit’ test” which looked at the degree of financial support, sharing of expenses/income, extent of joint property/liabilities, and any other financial intermingling or interdependency. The court in In re Jewell, 365 B.R. 796 (Bkrtcy.S.D.Ohio, 2007) decided that the debtors could include their adult daughter and the daughter’s three minor children as members of the household, but did not have to include their adult son, who also lived at their home, where the adult daughter was dependent on the debtors and unable to contribute to the household, but the adult son earned his own income and paid for his own expenses, and unlike the the daughter was not part of the “economic unit” that constituted the household. In a New York Chapter 7 bankruptcy case, In re Fraleigh, 474 B.R. 96 (Bkrtcy.S.D.N.Y. June 12, 2012), Southern District of NY Judge Cecelia Morris cited her earlier decision In re Herbert, 405 B.R. 165, 169 (Bkrtcy.S.D.N.Y. March 5, 2012), which adopted the economic unit test. In a well written summary of the various approaches determine household size for the purpose of the means test., Judge Morris explained what she viewed as the flaws with the IRS and Census standards.
Even where the Chapter 7 debtor passes the means test under Section 707(b)(2) the debtor may still have issues with Section 707(b)(3) which deals with bad faith and abuse by the debtor when the court considers the “totality of the circumstances”. Often the court looks at large purchases made before the filing of a Chapter 7 case or large additional income to be received after the filing. For example, the Court In re Hageney, 422 B.R. 254 (Bkrtcy.E.D.Wash.,2009) decided that debtor’s Chapter 7 case was abusive where it was filed several days before receiving income from significantly higher paying job and where debtor purchased an expensive motorcycle shortly before filing. New York Bankruptcy Judge Jerome Feller decided in In re Perelman, 419 B.R. 168 (Bkrtcy.E.D.N.Y 2009) that although the debtor had over $9,000./month contractually due on his residence and resort condominium and passed the means test, the income available to debtor from the surrender of such assets had to be considered in dismissing the case based on the totality of the circumstances. Similarly, Bankruptcy New York Western District Judge Bucki held in In re Boyle, 412 B.R. 108 (Bkrtcy.W.D.N.Y. 2009) that the debtor’s reaffirming a $63,000. obligation of $1,000./month on a boat which could have paid the debtor’s unsecured creditors was in bad faith and that the case should be dismissed unless the debtor’s converted the case to chapter 13.
Passing the means test for some cases that are significantly over the six month median can be difficult for residents of Nassau and Suffolk Counties contemplating a Chapter 7 bankruptcy case. The legislative goal is to cause the debtor and his attorney to instead file a Chapter 13 case where on Long Island there is a more favorable approach to the means test so as to potentially allow the debtor to pay a relatively small percentage of their debt in Chapter 13 rather than to completely eliminate the debt in Chapter 7. While planning for a bankruptcy case is allowed under the case law, such planning should not be so blatantly manipulative as to cause the case to potentially be dismissed as a “bad faith” or “abusive” filing. If a potential Chapter 7 Nassau County or Suffolk County client is “border line” as to the means test it is important to see how close they are to passing and whether the effort to try to file them in Chapter 7 is realistic. If they are potentially close to filing than a certain amount of planning, potentially over time, can be initiated to try to have the case “fit” into Chapter 7.
Firstly, all income must be reviewed from the debtor’s pay stubs and bank statements and tax returns from the previous six (6) months. To the extent there are variations with the income, the debtor should strive not to engage inactions that cause income to unusually increase or to raise amounts shown beyond standard, necessary amounts.
Secondly to the extent that there are expenses the debtor wants to document to reduce disposable income, the debtor should document, record, save and potentially enlarge the following expenses that are considered to reduce “disposable income”: secured/leased payments for vehicles deemed necessary, term life insurance, health insurance, disability insurance, medical bills, income taxes, real estate taxes, charitable contributions, medical bills, childcare, children’s education expenses, and other expenses viewed as necessary household expenses.
Thirdly, the number of household members needs to be accounted for and if there is a borderline situation, with family living in the house, than under the various tests it should be considered with the goal of trying to add members to the household who are dependent but do not contribute much income.
Fourthly, expenses that are solely that of a non-filing spouse and are solely paid by the non-filing spouse which are of a personal, rather than a household nature, can be deducted under as a marital deduction.
Fifthly, the client’s prospective yearly income tax refund or tax due under the tax return as divided by twelve over the year will either raise or lower the computed tax deduction. Sixthly, when all else fails file in Chapter 13 and try to get a plan with low pro-rata monthly payment; if you can’t sustain the Chapter 13 the conversion to Chapter 7 will allow for a case that should be easier once converted than one initially filed directly in Chapter 7.
The Law Office of Ronald D. Weiss, P.C. represents Nassau and Suffolk County Chapter 7 clients. Even prior to assessing whether a Chapter 7 Long Island case is possible and advantageous, an experienced bankruptcy lawyer will discuss with you the major factors in deciding whether your situation can qualify for a Long Island Chapter 7 bankruptcy case and how such a case could eliminate and/or reorganize your debt.
Our consultations are free, the advice may be invaluable.
Please call us at (631) 271-3737, or e-mail us at email@example.com for a free consultation with an attorney at our Melville, Long Island law office to discuss your specific situation and whether a Chapter 7 bankruptcy case may help you.
“Ronald Weiss helped me get a discharge order in my Chapter 7 bankruptcy case. I appreciate the efforts of his office to find solutions to my financial troubles during a difficult time in my life. His advice and helpful planning has made this process a lot less painful. Now that we have dealt with my credit card problems I will retain his services to help me obtain a modification.”