The Means Test and the Term Presumption of Abuse – August 2016 Interview

Katherine:

Our friend Pete Moak, attorney Walter Pete Moak, is joining us from The Moak Law Firm again today. He’s going to share with us more news in the world of bankruptcy for us to have a better understanding and to build confidence in this word bankruptcy. I know I started with you, Pete, a while ago saying that bankruptcy feels like a bad word but you’ve taught us so much in the few sessions that we’ve had together already, so welcome back.

Pete Moak:

Thank you very much. I’m glad to be back and glad to share more information that’s helpful for the people who are struggling and overwhelmed with debt. The bankruptcy code is designed to help people who are the honest but unfortunate who cannot afford to make the payments that they need to make and can be relieved from the burdens of oppressive debt. I just love setting people free.

Katherine:

Tell us what your topic is for today and let’s begin setting more people free.

Pete Moak:

Okay, great. When a person is filing Chapter 7 bankruptcy, one of the things that will need to be determined is whether or not they are eligible because of their income. The income levels for every state is determined by the census bureau. About every 6 months the census bureau issues a new report regarding the median income levels for every state and territory that we have jurisdiction over in the US Bankruptcy Courts. The median income is changed every 6 months, but it goes up a little, down a little over the period of time, kind of depending upon whether or not people’s incomes are creeping up a little bit or are they going down a little bit.

Currently the median income based up on the census report from April of 2016 has an indication that a person’s median income in Arizona for a one person household is $45,988. Now it goes up from there based upon how many people are living in the household. The people living in the household is heads on beds, in other words, they don’t necessarily have to be related to you, but it’s the people in the household that you are supporting. That’s the way we determine how much money can be used to figure out your median income or your disposable income for purposes of qualifying for a Chapter 7 bankruptcy.

About 10 years ago the Congress changed the rules with regard to bankruptcy so that people who are in the lower portion of our income, in other words, if we’ve established the median income, they would be below the median, those people are eligible for a Chapter 7 bankruptcy and do not have to pass the means test. However if they make too much money and they have too much disposable income, the US Trustee still may object to their receiving a Chapter 7 bankruptcy discharge and use the term that it would be an abuse of the bankruptcy system to allow someone who has that much disposable income to not use that to pay the debts that they owe. They will be asked to file a Chapter 13.

As we’ve indicated in previous sessions, a Chapter 7 says that a person who receives a discharge does not have to use any of their future income to pay any portion of the debts that they have that are allowed to be discharged in bankruptcy, whereas in a Chapter 13 the debtor has to contribute the money that is available as disposable monthly income to pay that money toward their debts. If the amount of money that they are paying toward their debts over the next 5 years is more than 25% of the debts to the unsecured creditors could be paid from that income, then the US Trustee will file a motion allowing this person to file under Chapter 7 would be an abuse of the bankruptcy system.

One of the questions that we have to ask when we meet with somebody is the amount of income that they receive and that’s the reason it’s important to look at their pay stubs because it’s amazing that people don’t have a strong grasp of how much money they make. They get paid and of course they go to work and they have things they have to do, and so they’re not really watching that figure exactly, but we need to be able to calculate that so we need to look at their pay stubs and we figure out how much money did that person earn during the 6 month period before the month that they are going to file bankruptcy. It’s a moving target. If somebody comes in to see me this month, they may not qualify but next month they might. Why? Because the first month in that 6 month period may have represented a high income month.

Congress was trying to figure this out and determine how much of a period of time should we look at to determine what a person’s average monthly income is? Some may have thought, “Let’s look back a whole 12 months.” That may be unfair because a person’s current month may be low and that may represent an inadequate amount of money to pay their debts, whereas if you include money that they made almost a year ago, it’s unrealistic because that represents too much income. They compromised and said, “We’re going to look back 6 months.” If we’re filing in the month of August, which we’re in right now in 2016, then we would be looking at the months of February, March, April, May, June, and July as the 6 months that are relevant for determining the average monthly income.

If we know the average monthly income and it’s below the median income for the household size that you have, then you are under the median and you can file under Chapter 7 bankruptcy. We also have to compare your current income with your current monthly living expenses. This is where we list out all of the monthly living expenses according to the allowed expenses under the Internal Revenue code that is used to determine whether or not the Internal Revenue code will give you a payment plan to pay your back taxes. It’s been adopted by the bankruptcy court so that’s how we look at determining what is the allowable expenses. Those allowable expenses, you may have expenses that are under the allowable amount but for purposes of bankruptcy you’re allowed to count all that is … that full amount even if your actual expenses are less than that. In other areas you have the ability only to claim your actual expenses even though the guidelines indicate that the average is more.

For example, we’re looking at what is the allowable expense for food expense for a family. Even if you don’t actually spend what is allowable, you can claim the full amount whereas in the amount of medical, you may have medical expenses that are well below the allowable. In other words, there is no maximum allowable. In other words, you could have whatever your actual are you can claim, but if your actual are low that’s all you get to claim. You don’t get to do it in every category. When we figure out that amount that is disposable, which is the difference between your average income and the monthly living expenses, then we’ll say, “Okay, if you have more than $200 a month leftover, the likelihood is that the US Trustee is going to claim that you have sufficient disposable income to be paying your creditors through a Chapter 13 bankruptcy. If they file a motion to dismiss your Chapter 7 case because you have too much disposable income, it said that a presumption of abuse has arisen in your case and therefore you should be filing bankruptcy under Chapter 13 instead of Chapter 7.

There is some ways that we can look at, “Well, do you have special circumstances that might justify you still being allowed to file under 7 instead of Chapter 13? I tell my clients when I meet with them that if they are wanting to file a Chapter 7 bankruptcy and they have time to wait to file, we can figure out ways to organize their expenses in such a way that they can pass the means test. This is a pretty solid experience that we’ve had. Of course sometimes there are people that just make way too much money and they’re not going to qualify. There’s two steps to the process so we figure out your average monthly income, compare it to the median income in your state, and then we also have to compare your income to your living expenses so that we can figure out whether or not you have sufficient disposable income or sufficient means to be able to pay your creditors more than 25% of the unsecured debts over the next 5 years.

All of that’s pretty complicated but we figure that out for our clients so that they know whether or not they’re going to be able to pass the means test. It’s sometimes very important in determining when are we going to file their bankruptcy because incomes fluctuate and so there may be, “Well, if we wait another month because your income is going down you’ll be able to qualify,” whereas if your income is going up we may need to hurry up and get your case filed before your bonus check comes in this month and you end up having to include that income and therefore you’re over the median and you can’t pass the means test. All of that is a very important part of figuring out whether or not you’re eligible for a Chapter 7 type bankruptcy. Katherine?

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Katherine:

All right. I’m here. I’m listening. I was like I don’t want to break in but I want to make sure that we’re clarifying because you talked in the very beginning, you said that bankruptcy is for honest people who have run into misfortune. Our topic today had me thinking that we was going to talk about people getting caught telling lies in bankruptcy.

Pete Moak:

No, there is a situation where people sometimes, if they do tell lies, then of course they could lose their bankruptcy protection, in other words they could be denied a discharge in bankruptcy, and that, would of course, be unfortunate. It’s a very important thing that when I interview the clients that they understand that they need to tell me the truth so that I can figure out the best way to actually help them before they get caught in a situation where they are unable to back out and they’ve been caught in something that will deny them a discharge regardless of what the truth is.

Katherine:

Okay, that makes it more clear to me. Is that bad that I was looking for somebody to get in trouble?

Pete Moak:

No. Everybody does have some ideas. One of the common questions that people ask me, “Mr. Moak, how will they know that I have extra income on the side? That I’m doing side work and getting money in cash?” I said, “The one thing is that you have to recognize that when you fill out your petition and we put the information in there, it’s under oath. If you don’t disclose that you’re committing perjury.” The Department of Justice is the one that’s responsible for investigating bankruptcy fraud and that includes the Federal Bureau of Investigation, which is their investigatory agency. You don’t want to be in the position of having the FBI looking into your affairs to determine whether or not you are dishonest with regard to disclosing your income or your debts.

That’s a problem, and also it’s a problem because if you tell your attorney, your attorney has the obligation to not assist anyone in committing perjury. If somebody tells me something that’s true, they can’t back out of it and say, “Okay, but let’s change that and we’re only going to say this on the petition because I want to make sure I qualify for a Chapter 7 so I’m not going to tell the whole truth.” If an attorney goes forward with representing that person knowing that that’s not the truth, then the attorney is assisting somebody in committing perjury and the attorney can lose his license. They’ve got to be real straight on this.

Katherine:

That’s not what the individuals are doing?

Pete Moak:

That’s right.

Katherine:

Okay, awesome. Every time you come you share with us some wonderful information. Shame on Katherine, smacking my hand for wanting someone to get in trouble. I didn’t really but I was like, “Ooh, this sounds juicy.” This was juicy, definitely in a different way, positive way. Each week you come and you share with us, again from your wealth of information, what bankruptcy can do to benefit someone getting their life back on track. Thank you again, Pete. Tell people how to get in touch with you outside of t
This Needs to be Said.

Pete Moak:

Thank you, I’m happy to do that. Please call me at 480-755-8000 extension 1 is used for people who are calling in to schedule an appointment. I’ll be happy to talk with you and schedule an in-office consultation. We allow a 30 minute free in-office consultation for people who are coming in for the first time, and then of course usually they end up hiring me and we start working on their case immediately. We’re happy to help. 480-755-8000 extension 1. My website is http://www.themoaklawfirm.com

Katherine:

Until next time, Pete, have a good day.

Pete Moak:

All right. Great, thanks.

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