Portland Bankruptcy Law Group

If you have the “means” to pay a meaningful amount to your creditors in a three-to-five-year Chapter 13 payment plan, you ought to be disqualified from being able to file a “straight bankruptcy” of Chapter 7.  That’s the theory of the “means test.”

In practice, for many people it is quite an easy hoop to jump through. For most, it ultimately does not stop them from filing Chapter 7 if they want to do so. Yet, for a small percentage of bankruptcy filers, it does indeed disqualify them from Chapter 7. Where do you fall?

It’s basically a two-part test. First, the income portion, second the expenses portion. We’ll tell you the first part in this blog, the “easy hoop” we just mentioned. You should be able to calculate with a fair amount of accuracy whether you beat this part of the means test. If you do, you win—you very likely get to do a Chapter 7 case without even needing to take the second, lots more complicated part of the test. We’ll tackle that second part of the test in our next blog for those who can’t avoid it.

The first part of the means test compares your income to a published “median income” for a household of your size in your state. If your income is less than the median, you’re done with the test—you get to file under Chapter 7.

Your income for this test is based on the precise amount of income you received (from every source, not just taxable income, except social security-related benefits) during the six full calendar months before your case is filed. So, for example, if your case is filed on October 7, we look at every dollar you received in the six-month period from the prior April 1 through September 30.

Notice that if you have some flexibility about when your case is filed, and if your applicable income is not precisely the same all the time, then you may well be able to adjust the timing of your filing to reduce your income during the applicable 6-month period. Remember we’re including ALL income, including irregular ones like bonuses, unemployment benefits, and support payments.

Once you know when your Chapter 7 is being filed, and therefore know what income your household received during the prior 6 full calendar months, that income is essentially multiplied by two to arrive at an annual income. If you live in Oregon, compare that annual income amount to the following table of median incomes:

* Add $7,500 for each individual in excess of 4.

If your income, as calculated in this precise fashion, is no more than the amount applicable for your family, then you can file a Chapter 7 case without having to do the expense side of the means test.

If your income is higher, don’t despair—once we go through the rest of the means test you may well still qualify. We have to tackle that in our next blog.

If you have a loan against your vehicle, and this is a vehicle you want to keep, you definitely want to know whether you qualify for a cram down.

A cram down on your vehicle loan could allow you to keep your vehicle while paying thousands of dollars less for it, often while also reducing the monthly payments on the loan. The term comes from the basic concept that you are essentially allowed to pay for the value of the vehicle instead of the contract balance, assuming that the vehicle is worth less than the balance. You “cram down” the debt to the value of the vehicle. But how much you actually save altogether, and how much you save each month, depends on the facts of the case. Don’t worry; we won’t leave you hanging. We’ll explain in a moment, so you’ll be able to at least get some idea how much money a cram down might save you.

But we don’t want you to get all excited about it if you don’t qualify. And the rules for qualifying are—for a change—really straightforward.

Vehicle cram downs apply only in Chapter 13. There’s no such thing in Chapter 7. If you have your heart set on a straight Chapter 7—a get-your-debts-discharged-in-three-months bankruptcy, don’t even think about a cram down on that vehicle loan. In Chapter 7, it’s take it or leave it. Keep that vehicle and sign on for the rest of the full loan, or surrender it and (almost always) owe nothing. Only Chapter 13, the pay-for-three-to-five-years bankruptcy, lets you keep your vehicle and not pay the full loan balance.

That is, you get a cram down if you also meet the second condition: the vehicle loan was originated more than 910 days (about two and a half years) before you file the Chapter 13 case. If your vehicle loan is not that old, no cram down.

So let’s assume you qualify—you’re in a Chapter 13 case with a vehicle loan that’s old enough. How much money are you going to save with a cram down?

The first part of the answer is pretty easy. We mentioned it above—the new cram down amount you would pay is the fair market value of the vehicle.  Your savings is the difference between that value and your contractual loan balance. Of course the value of any vehicle can be open to some dispute, but that’s usually resolved with some simple negotiations. There’s usually not enough money in it to waste everybody’s attorney fees on litigating this.

Then calculating the amount of the new monthly payment on that new reduced balance is a matter of simple math. We re-amortize the loan, meaning we calculate what payments are needed to pay off the new value-based balance within the life of the Chapter 13 Plan. The cool thing is that often not only is the balance to be paid reduced, the length of the remaining term of the loan can be stretched longer than it would have been under the contract, and often the interest rate is reduced, all potentially greatly reducing the new monthly payment.

The last part of the “how much do I save question?” is the tricky part. The part of the loan balance that isn’t being paid—the amount beyond the value of the vehicle—is treated like an unsecured debt. That means it is lumped in with the rest of those bottom-of-the-barrel debts, which are all paid however much your Chapter 13 Plan says those debts get paid. Sometimes that pool of unsecured debts is paid a little, sometimes a lot, sometimes it is paid nothing, sometimes (rarely) it is paid in full. It depends on your whole financial picture–your income and expenses, assets and debts—and how that all interrelates with all the rules of Chapter 13 as applied to your case. Hint—in most Chapter 13 cases with a vehicle cram down, the unsecured portion of the vehicle loan gets paid little or nothing.

A Chapter 13 vehicle cram down is usually a very good deal, if you qualify for it.

You are about to file a Chapter 7 or Chapter 13 case. You know in a Chapter 7 that your bankruptcy trustee is the person who looks over your paperwork and talks with you for a few minutes, mostly to decide whether or not everything you own is exempt so that you can keep it all.  In a Chapter 13 case you know that this trustee helps determine whether the Plan we submit meets legal requirements, and then gets my monthly Plan payments and distributes them to my creditors. The “Office of the United States Trustee” is a different player altogether.  It CAN cause major problems especially in a Chapter 7 case, so it helps to know its role, even though in most cases it mostly works in the background.

The U. S. Trustee is part of the United States Department of Justice, and does mostly two things: 1) helps the Bankruptcy Court administer bankruptcy cases, and 2) enforces bankruptcy law. These are reflected in this agency’s stated mission: “to promote integrity and efficiency in the nation’s bankruptcy system by enforcing bankruptcy laws, providing oversight of private trustees, and maintaining operational excellence.”

In its administrative role, the U. S. Trustee appoints and supervises the Chapter 7 and Chapter 13 trustees. It keeps an eye on bankruptcy cases so that they are administered efficiently. It reviews and can object to fees charged by attorneys and other professionals.

In its enforcement role, the U. S. Trustee can spell trouble in two ways. 1) In a Chapter 7 case, it can try to “convert” your case into a Chapter 13 case. And 2) it can accuse you of providing inaccurate information on your bankruptcy documents or while you are under oath during your hearing with the trustee.

In most cases it’s not all that hard to make sure that you don’t hear from the U. S. Trustee.

First, as for not having your Chapter 7 cases being challenged as belonging under Chapter 13, this is mostly a matter of your income and expenses—whether your case meets a complex set of rules called the “means test.” Avoid this kind of objection by the U. S. Trustee by working closely with your attorney before your case is filed to make sure you clearly meet this test.

And second, as far as avoiding allegations of misrepresentation, again it’s a matter of appropriate preparation. Diligently provide your attorney with the paperwork and information needed so that all of the documents prepared for the Bankruptcy Court and for the Chapter 7 or 13 trustee are accurate and consistent.

The fact is that a fair amount of the bankruptcy process operates under the honor system. The U. S. Trustee is there, looking over your shoulder, to keep it honest.