| Brooks Cotten | 0 Comments | Bankruptcy Law

What is the “Means Test” in Chapter 7?

The “means test” is a formula enacted into the Bankruptcy Code in 2005. Congress decided that too many Debtors were “abusing” the bankruptcy process by discharging debt that they really could afford to repay.

The “means test” was added to the bankruptcy statute to provide an “objective” method for the Bankruptcy Court to determine which Debtors can repay their unsecured debt (at least in part) in a Chapter 13 case. If a Debtor fails the means test, his Chapter 7 bankruptcy case is presumed to be abusive, and the United States Trustee will seek to have that case dismissed or converted to another Chapter under the Code. Debtors who fail the test would be required either to convert their case to a case under Chapter 13, or pursue non-bankruptcy options.

The way the test works is that all of the gross income coming into the “household” during the six months before the case is filed is added together. Any changes during that period, such as being unemployed, are not generally considered. All income is taken into account, including bonuses, personal injury awards, and the like.

That big number is then divided by six to arrive at a number that approximates “current monthly income”. Internal Revenue Service statistics are then used to compare that “current monthly income” for the Debtor’s household to the income of households of the same size in the state. If the Debtor’s “current monthly income” is less than “median” income for a household of the same size, Debtor passes the objective part of the test.

If the Debtor’s household is more than median income, the Debtor does not necessarily fail the test. In that case, the lawyer must continue with the long form of the formula. The formula provides that certain items are to be subtracted from “gross current monthly income” such as taxes, insurance, child support or alimony, and payments made on secured debt like houses and cars. In addition, standard “allowances” are made for housing expenses, vehicle expenses, utilities, food, clothing, medical expenses, and the like. After making these subtractions, your “disposable income” needs to be zero (or close to it). If it’s not, you fail the test, but if you have “extraordinary circumstances”, there is an opportunity to assert those circumstances (and document them). Thus, you may “pass” anyway if your circumstances meet certain standards and are properly documented.

The means test is complicated, but is not ordinarily a problem if you are overwhelmed by debt, and really can not afford to pay. The test does require that you provide documents such as pay stubs, and it requires that a lawyer make calculations using a computer to keep up with changes in the formula as Congress updates it on an ongoing basis. You shouldn’t worry about it, and should arrange a careful consultation with an experienced lawyer as part of the process of considering a bankruptcy filing.

Please call us at 678-519-4143 to discuss your particular situation with our lawyers.

| Brooks Cotten | 0 Comments | Bankruptcy Law

Effect of Filing Chapter 13 Bankruptcy on Repossessions: Questions and Answers

Q: I was behind on my car payments, and my car was repossessed. Can filing a bankruptcy help me get it back?

A: Yes. Chapter 13’s (not Chapter 7’s) are often used to cure defaults on car notes. Having a car repossessed does not cause you to lose all of your rights in that car. Under state law, you have the “right to redeem” a car (by paying for it in full) for 10 days or until the car is sold, whichever is longer. Thus, if the car has not been sold, you can use a Chapter 13 to force the lender to give it back, and let you pay for it over a period of years through your Chapter 13 plan. We can normally recover a repossessed car very quickly by filing a workable Chapter 13… assuming that you have full coverage insurance in place with the lender listed as the lienholder on the policy.

Q: I received a letter from the car lender saying that I have ten days after repossession to “redeem” the car by paying for it in full. I don’t have that kind of money. Does that mean that the car will be lost after 10 days if I don’t pay for it in full?

A: No. By statute in Georgia, the car lender has to give you ten days to “redeem” the car by paying for it in full. After 10 days, they can sell it, and if it is sold in an “arm’s length” transaction, that will cut off your rights so that you can’t get it back. What’s more, they can sue you to collect any “deficiency” if the car sells for less than what you owed on it.

However, the car will remain your property even after 10 days has run so long as it hasn’t been sold. In other words, so long as the car has not been sold, you can stop the lender from selling it by filing a Chapter 13, and then you can force the return of the car to you as property that is necessary for the successful completion of your plan.

Q: Are there any circumstances where I can’t get the car back?

A: Yes. If the car was legitimately sold before you filed bankruptcy, you can’t get it back. Second, you can’t force the lender to give it back unless you can prove to him that you have valid full coverage insurance on it. Thirdly, to benefit from Chapter 13, you need to be able to file a good, workable plan.

If you can’t file a passable plan for one reason or another, the lawyer should not file the case just to get a car back, because it won’t work in the long run either for you or for anybody else.

Q: How long does it take to get a car back after I file Chapter 13?

A: In most cases, you can get the car back in a matter of hours or in a day or so. You’ll need to prove full coverage insurance, and of course, we would have to successfully reach a decision maker by telephone or fax. This is not usually a problem for major car lenders, and is only occasionally a problem with smaller lenders. Of course, if you have a terrible relationship with your lender, that will make getting them to cooperate more difficult, but not impossible.

Q: Are there any other advantages to filing Chapter 13 after a repossession?

A: Yes. It is often cheaper to pay for a car through Chapter 13 than under the contract. In Chapter 13, the interest rate can be reduced to a rate that is around two or three percent over prime, which may be much less than what you are paying under the contract. Further, you can stretch the payments out and take up to five years to pay. In a given case, this can substantially reduce what you are paying monthly.

Call attorneys H. Brooks Cotten or Gina Karrh at 678-519-4143 to discuss your particular situation, and they can discuss your options with you. 

| Brooks Cotten | 0 Comments | Bankruptcy Law

Bankruptcies and Vehicle Repossession: Q & A

Q: I was a little behind on my car payments, and my car was repossessed. Can filing a bankruptcy help me get it back?

A: Yes. Chapter 13’s are often used to cure defaults on car notes. Having the car repossessed does not in and of itself make you lose all of your rights in the car. So long as you have any remaining rights, you can usually use a Chapter 13 to force the lender to give it back and let you pay for it through your Chapter 13 plan. Read more “Bankruptcies and Vehicle Repossession: Q & A”

| Brooks Cotten | 0 Comments | Bankruptcy Law

Bankruptcies and Foreclosure: Q & A

Q: I’m behind on the house payments. My bank stopped accepting payments, and I received a letter saying that my mortgage has been referred to a lawyer for foreclosure. What does that mean? Will filing a bankruptcy help this situation?

A: “Foreclosure” is the process by which the lender on real estate takes title back from the borrower because of a default, usually by missing payments. There is no minimum number of missed payments that will trigger this action. If payments are not made according to the schedule set out in the note, the bank has the discretion to foreclose.

Read more “Bankruptcies and Foreclosure: Q & A”

| Brooks Cotten | 0 Comments | Bankruptcy Law

What’s the difference between Chapter 7 and Chapter 13?

Chapter 7 and Chapter 13 are different tools that are used to handle different financial problems. Chapter 13 is a debt consolidation plan used to repay debt in full or in part over a period of years. Chapter 7 is a fresh start or liquidation case that is usually finished after only a few months.

In Chapter 13, you can force secured creditors like mortgage lenders or car lenders to allow you to cure defaults over time, whether they agree or not. In Chapter 7, unsecured debts are discharged without payment, and you indicate your preference (intent) as to whether or not you want to “reaffirm” and keep paying your secured creditors. Alternatively, you may surrender the collateral and discharge the debt.

Read more “What’s the difference between Chapter 7 and Chapter 13?”