What Is The Means Test In Bankruptcy And How Does It Impact Me?

In 2005 banks and other lenders lobbied Congress in the hopes of having different bankruptcy laws written. Unfortunately Congress listened and the entire bankruptcy structure in place was overhauled. One of the most significant changes to the bankruptcy system was to implement a complex mathematical formula into the first step required for filing a case. Distressed borrowers were no longer free to decide if they wanted to file a Chapter 7 case or a Chapter 13 but instead had to put their finances through a legal formula that fails to take into account certain personal issues a borrower faces. That test is called the means test and it has a big impact on what type of bankruptcy case you are eligible to file.

The means test requires a potential bankruptcy filer to enter data about their debts and their income. Here’s the short story on how the means test will impact you:

•        All of your income has to be accounted for when performing the test and this will include any bonus or overtime pay you have recently received.

•        Your secured debt is factored in to the computation to come up with a figure that compares what you bring in versus what you pay out in secured debts each month.

•        The figure that results from the test determines if you have enough disposable income left over after paying all of your secured debts to pay any portion of your hard earned money to your unsecured debts each month. If you do have money left over that can go towards credit cards or other unsecured debts like signature loans or medical bills you will be required to file a Chapter 13 case rather than a Chapter 7.

Because of the ability to discharge unsecured debt in its entirety in a Chapter 7, that is the preferred type of case for most people who file bankruptcy. But a Chapter 13 has its benefits as well and you should not give up on the idea that bankruptcy can help you if the means test reveals you are only able to file a Chapter 13. It might sound discouraging to have to repay even a small amount of unsecured debt, but being able to reorganize your monthly obligations in such a way that allows you a little breathing room is a huge factor to consider. If you are having a hard time keeping current on your bills, call our office for help. We will walk you through the steps and explain the difficult means test computation to you in a way that makes sense.

For more information about the means test and how it impacts your case, call us today or reach us online at www.law-ri.com. We will help by coming up with solutions that work for you and have multiple locations for more convenient one on one office visits.

What Is A Chapter 13 Bankruptcy?

Many people today have more debt than they can pay on a regular basis. Being in this situation is stressful to your family and can cause anxiety that leads to more serious health and emotional issues. But there are options out there, and understanding how those options work can relieve some of the pressure you are under when faced with overwhelming debt. Every day thousands of people across the country file for bankruptcy in order to get out from under heavy financial burdens and you can too. When you file bankruptcy you have a choice about what type of case to file. Consumer cases are either Chapter 7 matters or are filed under Chapter 13.

A Chapter 13 bankruptcy is a type of case that allows you to reorganize your debt in a similar way to doing a debt consolidation. With a Chapter 13 case, you take the following steps:

•        Prepare a proposed plan of how you are going to repay your debt. The plan sets forth your proposed repayment amounts on secured debts like your house and car by outlining the amount you are willing to pay for the item. With your house you will likely have to repay what is owed on the note, but with a car you can pay the value rather than the full amount due. By reducing the amount you owe on a car loan to only paying what the car is worth, you save a lot of money. You can also propose a lower interest rate on autos and this will save money as well.

•        The plan is filed and all of your creditors are given notice and an opportunity to accept the terms you propose, or object to the plan and seek a different repayment scheme.

•        The Court will listen to what you have to say about how you intend to repay your debt, and what the creditor thinks they are entitled to receive. Once the Court hears both sides a final decision will be made and an order confirming a repayment plan will be entered.

•        Once the order confirming plan is entered you will make one monthly payment, covering all of the debts in your plan, to the Chapter 13 Trustee. The Trustee will then disburse the funds to your lenders so you don’t have to pay them directly. However if you make the decision to pay some lenders directly and then pay the rest of your total monthly debt payment as set forth in the Chapter 13 Plan to the Trustee, you may do so.

If this all sounds complicated just remember that a Chapter 13 is like consolidating your debt into one lump sum payment per month. Even a portion of your unsecured credit card debt is covered under a Chapter 13. We can help you gain a better understanding of how this works by looking at your debt and income and then developing a repayment plan that works for you.

For more information about Chapter 13 bankruptcy, contact us at www.law-ri.com. We will help by coming up with solutions that work for you and have multiple locations to meet your needs for office visits.

What Is A Chapter 7 Bankruptcy?

If you are behind on your bills you might be considering filing for bankruptcy, but have some questions about what that really means. Common concerns include wondering if your property will be taken away from you or if you get to keep your things without making the payments. Some people also worry about the potential damage filing bankruptcy has on their credit score and if that means they will never be able to take out a loan again. Rest assured that when you seek the protection bankruptcy has to offer your life is not over.  You will be able to continue to conduct your financial affairs and you can start repairing your credit right away. It is also possible to keep your property when you file bankruptcy, but you do have to maintain regular payments on certain things. The pieces of collateral you continue to pay for depends on the choices you make when filing, one of those choices being what chapter of case you choose.

There are two main types of consumer bankruptcies, a Chapter 7 and a Chapter13. A Chapter 7 bankruptcy is best summarized as follows:

•        Chapter 7 cases are like liquidations, meaning most of your debt is eliminated.

•        There is no requirement that you continue to pay for your high interest rate credit cards or other unsecured debt in a Chapter 7 case.

•        The things you want to keep, like your house and car, can be kept by agreeing to make the payments due on the loan. You can do this by signing a new agreement during your case, called a reaffirmation agreement.

Chapter 7 cases usually take about 90 to 120 days to complete. Once finished the debts that have been discharged are no longer due and the lender cannot ask you to pay. For debts that have been reaffirmed though, you do still owe the money and will be required to make the payments even after your case is finished. A Chapter 7 can help you get back on track with your finances and start fresh when thinking about how to budget your paycheck. Call us today to find out if this type of case is right for you.

For more information about how to handle overwhelming debt, contact us at www.law-ri.com. We will help by coming up with solutions that work for you and have multiple locations to meet your needs for office visits.

Debts Forgiven by Credit Card Companies Can Cost You More Than You Think

You received a letter from your credit card company, and they have great news for you.  They voluntarily forgave the money you owe them.  You breathe a sigh a relief and things are looking up for you now....or so you thought.

Did you really think your credit card company was doing you a favor because they are nice people?  You'll find out the hard way when you send you a Form "1099-C," which counts all of the debt your friendly credit card company forgave as income you never earned, but now may be liable to pay taxes on.

Had you filed bankruptcy before they forgave the debt, then there would be no chance of any tax liability for you.  Debts canceled by a bankruptcy court are never counted as taxable income.  Debts forgiven by credit card companies can be counted as taxable income.

I recommend reading the article below for a valuable explanation of how you can protect yourself from forgiven debt published in the Pittsburgh Tribune.

Debt forgiveness can bring surprise tax burden

http://triblive.com/business/headlines/10252963-74/debt-tax-pay

By Chris Fleisher | Wednesday, April 6, 2016, 8:54 p.m.

It's the one document from their lender that most people don't expect.

 

The form is the 1099-C. It is a single-page tax document sent by lenders or debt collectors, and because it looks nothing like the familiar W-2s sent by employers, many people assume it's junk mail.

 

But it is a critical piece of information for anyone who has had debt forgiven — credit cards, car loans, mortgages or student loans. And if ignored, it could land a taxpayer in big trouble with the federal government.

 

“It catches them all by surprise,” said George Siegel, a CPA and owner of Siegel & Company, an accounting firm in the South Side. “It's one of those forms they're not prepared for. Nobody tells them that they may possibly have to pay income taxes on discharged debt.”

 

Few people realize the tax consequences of having debt discharged. As the government sees it, when a lender forgives debt, it is essentially paying the debtor income. Any amount over $600 is taxable.

 

The issue affects many cash-strapped taxpayers who are least able to pay, said Shawn Wright, a tax attorney in Green Tree. After all, they are people who could not afford to pay their debts in the first place.

 

But they still may have options to avoid a severe financial hit.

 

“For many people, if they have the correct strategy, they can avoid having to pay taxes on any of it,” Wright said.

 

Just because someone receives a form 1099-C doesn't mean they have to pay taxes on the amount listed on the form. Not all canceled debt is subject to income tax.

 

Debts discharged in bankruptcy are exempt. Balances that have been forgiven on some types of student loans — e.g., federal or state loans — also cannot be counted as income.

 

Homeowners who have been through foreclosure or restructured the mortgage on their principal residence also get some relief.

 

A law passed during the housing crisis, called the Mortgage Debt Relief Act, excludes as income mortgage debt discharged up to $2 million. The law has been renewed several times since it was passed in 2007 and now extends through 2016.

 

But tax professionals say the most common type of debt discharged is on credit cards. Unfortunately, that is not among the exemptions.

Financially distressed taxpayers with credit card debt still have options, even if they are not bankrupt. Someone doesn't have to count discharged credit card debt as income if they lack the ability to pay it.

 

“You can be insolvent without being bankrupt,” said Joe Landolina, a tax attorney at the Downtown firm Love, Scherle & Bauer.

 

Insolvency means that someone owes more than the value of their assets. An insolvent person may not have to pay tax on any portion of a canceled debt, or maybe only a portion of it.

 

Here's a scenario from the Internal Revenue Service: Suppose “Greg” had $7,000 worth of assets — cash, a car, computer, furniture — and $15,000 of debt. He is insolvent by $8,000.

 

If Greg had $5,000 of his debt canceled — say, on a credit card — he would not have to pay income tax on it. Why? Because it is less than the amount by which he is insolvent. He therefore doesn't have to count the forgiven credit card debt as “income.”

 

However, suppose Greg had only $10,000 of debt, making him insolvent by $3,000. If he had that same credit card balance — $5,000 — canceled, then it would cover the amount by which he was insolvent, giving him $2,000 left over. That would be considered income. Therefore, he would have to pay taxes on it.

Information about canceled debts and exemptions can be found in Publication 4681 on the website IRS.gov.

 

Experts advise anyone who is confused to contact a tax professional. Spending a couple hundred dollars to hire an expert could save them a more expensive and time-consuming visit from the IRS, Siegel said.

 

Even if someone ends up paying thousands of dollars in tax on the canceled debt, they don't have to pay it all at once. The IRS usually is willing to work out a payment plan that could extend up to six years, Wright said.

 

“The problem that a lot of people have dealing with the IRS is they call and they can't get through to somebody,” Wright said. “Call early in the morning. You just have to be persistent. But it's not a difficult negotiation.”

 

 

Chris Fleisher is a Tribune-Review staff writer. Reach him at 412-320-7854.

Your Rights Protecting You from Debt Collectors

Federal law spells out in detail what actions debt collectors are permitted to take to collect on debts, and also what debt collection actions are illegal.

For example, debt collectors may only call you between the hours of 8:00 a.m. and 9:00 p.m.  Calls outside this time period are illegal.

Similarly, Debt collectors must stop calling you at work if you inform them (in writing or over the phone) that you are not allowed to get calls at work.  It's always a good idea to keep a copy of all correspondence and maintain a log of all phone calls to them.

There are many other rights you have to keep debt collectors from harassing you.  More details will be forthcoming in future posts here.

BANKRUPTCY FILING CANNOT BE USED AGAINST A PERSON APPLYING FOR A STUDENT LOAN

One of the most frequent questions clients ask me is if they file for bankruptcy, will they have a problem obtaining a student loan.  The answer is, neither a government OR private student loan lender may deny somebody a loan simply because they have file for bankruptcy protection in the past.  This protection also applies grants as well as loans.

Congress enacted legislation in 1994 to put this protection into law.


Here it is, in black and white: 

11 U.S.C. 525 (c)(1) - Protection against discriminatory treatment   (c)(1) A governmental unit that operates a student grant or loan program and a person engaged in a business that includes the making of loans guaranteed or insured under a student loan program may not deny a student grant, loan, loan guarantee, or loan insurance to a person that is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act, or another person with whom the debtor or bankrupt has been associated, because the debtor or bankrupt is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act, has been insolvent before the commencement of a case under this title or during the pendency of the case but before the debtor is granted or denied a discharge, or has not paid a debt that is dischargeable in the case under this title or that was discharged under the Bankruptcy Act.   Hopefully this information will provide some comfort about paying for school after having filed for bankruptcy.

DISCRIMINATION AGAINST A BANKRUPTCY FILER IS ILLEGAL

Many clients have the understandable concern that if they seek help and protection from their bills, that they will face negative consequences.

The U.S. Bankruptcy Code actually protects people who have filed for bankruptcy from discrimination.  Section 525(a) of the Code provides:

"a governmental unit may not deny, revoke, suspend, or refuse to renew a license, permit, charter, franchise, or other similar grant to, condition such a grant to, discriminate with respect to such a grant against, deny employment to, terminate the employment of, or discriminate with respect to employment against, a person that is or has been a debtor under this title or a bankrupt or a debtor under the Bankruptcy Act, or another person with whom such bankrupt or debtor has been associated, solely because such bankrupt or debtor is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act, has been insolvent before the commencement of the case under this title, or during the case but before the debtor is granted or denied a discharge, or has not paid a debt that is dischargeable in the case under this title or that was discharged under the Bankruptcy Act. "

This section of the Code governs discrimination by governmental units (Federal, state, local government, for example, as well as other governmental agencies, authorities, boards, etc.)

Therefore, a person who has filed for bankruptcy cannot, for example, be denied a job with the government because of a bankruptcy filing, denied a drivers license, the right to live in public housing, and many other services regulated by various levels of government.

Section 525(b) covers private employers, although, you should take note that it can be challenging to prove in court what the motive of a private employer really was.

Many people have been unaware of the protections built into Federal law to make the bankruptcy filing a true fresh start by making illegal various forms of discrimination against somebody who exercised their legal right to be free from debts.