Although every part of your bankruptcy petition is important, in many cases the decision about whether to file a Chapter 7, Chapter 13, or any bankruptcy at all will be based primarily upon your income and expenses. When we prepare a bankruptcy petition, we spend a considerable amount of time reviewing all sorts of income in the household. The paralegal will review six months of pay stubs for yourself, your spouse, and any other adults employed in the household. When I review the bankruptcy petition (which I do in every single case filed by my office), I review the pay stubs and other income sources, paying particular attention to cases in which the income is higher than average.
One of the major changes made to the bankruptcy laws in 2005 was the adoption of what is called “means testing.” The means test is a formula set up by Congress to determine whether your income disqualifies you from Chapter 7 relief. Although any person’s budget may come under scrutiny in a bankruptcy case, clients whose income falls above the median income for their family size will definitely have their cases subject to more scrutiny by the Office of the United States Trustee in a Chapter 7 case and by the Chapter 13 Trustee in a Chapter 13 case.
The means test is basically a formula adopted by Congress that provides guidelines for allowable expenses for various categories. For example, if you own a vehicle with a loan payment, you will automatically be allowed an “operating expense” of $265.00 per month. This operating expense is intended to cover the cost of gas, insurance, and maintenance. There are a number of such fixed allowances, and there are also a number of allowances based upon your actual monthly expenses, such as your mortgage and car payment.
As of the writing of this guide, the following represents the median income
levels in New York State:
Single person $45,548
Household of two $56,845
Household of three $67,292
Household of four $82,587
(add $7,500 for each additional household member)
Determining whether your income is above or below the median income is not always easy. Obviously, if you are a single filer with no one else in your household, then your income would be measured against the median income for a single person. However, if you have a household that includes adult children, parents, friends, or significant others, questions may arise as to whether these people can be considered dependents or household members. Surprisingly, there are really no exact rules on how the household size should be determined. For example, some judges believe that any child over the age of 18 should not be considered dependents, even if they are still residing in your household and have no independent source of income. Other judges routinely allow the inclusion of such dependents until they graduate college and sometimes even after that. As you can see from the above chart, the larger the household income, the more income you are allowed to have and still qualify for Chapter 7 relief. However, it may not necessarily be helpful to include household members that have independent sources of income. For example, if your adult son is working full time and earning $25,000.00 per year, you would probably not want to include him in your household size because you would then be forced to include his
income as well. This could cause your income to rise considerably above the median income level and could actually hurt you on the means testing formula. While it is always necessary to disclose the income and expenses of your spouse,there is some discretion on how to report the income of other household members in a Chapter 7 case.
In a Chapter 13 case, the situation is different. In most instances, the Chapter 13 trustee will require that you report every source of income in the household, even for those members that do not regularly contribute to your budget. For example, you may have an elderly parent residing in the home with you. TheChapter 13 trustee will ask about that parent’s income and expenses. The idea is to obtain an accurate representation of all available household income. Many clients feel that it is unfair for the trustee to inquire about sources of income other than their own. We certainly understand this reaction, and in many cases, we havechallenged the trustee’s position on this issue. However, in the vast majority of cases, it is actually very helpful to a Chapter 13 client’s budget to include other
sources of income. This is because the additional sources of income are necessary to prove to the Court that the budget is feasible.
Clients may have many different sources of income. The following represents a list of the most common sources:
1. Wages and salaries. It is rare to meet too many clients these days with fixed salaries. Most clients are paid at an hourly rate, and their weekly hours mayvary significantly. As indicated above, we will always look at pay stubs in order to complete the means testing and develop an accurate, historical record of your earnings. However, to the extent that the six-month history does not reflect your future earnings, adjustments can be made. You may be a seasonally employed construction worker. If we were to look at your earnings for the months of May through October, they would obviously be much higher than the earnings during the winter months. Other issues that have to be addressed in computing income are overtime and bonuses. There is no question that the availability of overtime varies greatly, and a client may receive $20,000,00 of overtime one year and then receive none in the next. As a general starting point, we will take a client’s overtime for the prior
12 months and divide it by 12 for purposes of preparing the current income schedule. However, we will ask the client to confirm whether this 12-month average accurately reflects future earning capacity.
Bonuses are treated in roughly the same manner. We will generally average the bonuses for the prior 12 months and list this as a monthly figure when preparing the budget. However, if the client expects that bonuses will either decrease or increase significantly going forward, we will make an appropriate notation in the budget.
2. Self-employment income. If you operate a business of any kind, you will have to disclose the income and expenses for the business. There are three different ways in which the income information has to be presented: a) Year-to-date gross income. Although this does not have to be disclosed in the budget, it does have to be listed elsewhere in the bankruptcy petition. Since you will be working on your income anyway, this is a good time to review the year-to-date information. Of course, the earlier in the year that the
bankruptcy petition is filed, the easier it is to gather this information.
b) Six month income and expenses. As indicated above, the means testing formula requires a review of your actual income and expenses for the business during the past six months. It probably means reviewing your bank statements and checks to verify all business related deposits and expenditures. It may also mean reviewing credit card statements and other records. In preparing the six month statement of income and expenses, it is important not to include personal expenses because those will be listed elsewhere in your bankruptcy petition. Often, the summary prepared by clients shows income considerably
higher than that disclosed on Schedule C of their tax return. This is because you are allowed to deduct certain expenses on your tax return that will not show up on the six-month summary. For example, the IRS allows a fairly generous mileage deduction. It also allows you certain depreciation expenses. In your six-month summary, there may be expenses listed for vehicle fuel, but this is likely to be far lower than the mileage deduction.
In our experience, it is rare to see a business showing so much income that it disqualifies the individual from bankruptcy relief. Also, if your primary source of debt is business debt rather than consumer debt, then the means testing may not even apply to you. In our experience in dealing with business clients, the single most difficult piece of information to obtain is the six-month summary of income and expenses. It is for that reason that we strongly encourage you to prepare this information prior to the first consultation with the attorney. Otherwise, it may be difficult to give you accurate advice regarding your
c) Income projections. The six-month summary of your income and expenses often does not reflect your anticipated future income. This is because many businesses (probably a majority) experience seasonal fluctuations. For example, if you are a self-employed concrete contractor, most of your income is going to be earned from May to October. You will probably have little or no income at all from November through April. Depending on when you file your bankruptcy petition, the six-month historical summary is either going to show significantly higher or lower earnings than you actual experience on an annualized
basis. Therefore, when we prepare your budget, we will generally attach an itemized statement of your projected income and expenses. When you prepare this, you should try to estimate your average monthly income and expenses going forward. If you anticipate your income will be about the same in the next 12 months as it was during the past 12 months, you can simply take your actual figures from the prior year and divide them by 12. If you believe that your income or expenses will change during the next 12 months, this is youropportunity to present them in a way that most accurately reflects your projections.
In situations where the projected income varies significantly from the historical income, we will attach an explanation so that the case trustee andcreditors can understand the change in circumstances.
3. Pension and retirement income. Many people file bankruptcy shortly after they retire from their jobs. Those fortunate enough to receive pension or retirement income probably still have significantly lower earnings than when they were employed. It is important that we list all sources of pension income, including private employer pensions, public employer pensions, military pensions and any other income that you receive on a monthly (or periodic) basis based upon prior employment.
4. Social security, workers’ compensation and disability benefits.
Although these sources of income are fully exempt from creditors and in some cases are not even considered “income” for means testing purposes, it is still necessary to disclose them on your budget page. This includes any social security benefits that you may be receiving on behalf of a minor child or dependent. In many Chapter 13 cases, these sources of income are absolutely necessary in order to show that the plan is feasible. In a Chapter 7 case, it is highly unlikely that a client with disability or retirement income is going to be disqualified from bankruptcy relief.
5. Rental income. If you own any type of rental or commercial property, we will have to disclose the ongoing rent that you are receiving plus a statement regarding any fluctuations that you anticipate in the next 12 months. If you have a vacancy in one of your units, we will make a note of this. If you have a tenant that is about to move out, this will be listed as well. As with business income, we must disclose not only the ongoing rents but also the actual rents that you collected for the past six months and the year-to-date rents collected. If there are any expenses associated with the property, such as utilities, water bills, insurance, non-escrow taxes or mortgage payments, these will be listed as well. Obviously, we do not want to portray your rental income as being more than it actually is. For most
clients, by the time they finish paying the expenses associated with the property, there is very little left over. In fact, we find that many clients use significant amounts of money trying to maintain rental properties. If this is your situation, we may recommend that you “surrender” the property if there is a mortgage against it. Your bankruptcy petition will discharge all liabilities that you have on the property, with the exception of fines or other criminal penalties imposed in housing court.
Most people are very much aware of their monthly expenses. Actually, it is precisely because of their difficulty in meeting some of their monthly expenses that they are forced to consult with a bankruptcy attorney. The following represents a listing of all expenses that should be disclosed in the bankruptcy petition.
Mortgages and home equity loans
Real estate taxes
Home electric service
Home heating and gas
Cell phone service
Water and sewer charges
Home maintenance and upkeep
Laundry and dry cleaning
Medical and dental out-of-pocket expenses
Vehicle fuel and maintenance
After school activities
Homeowner’s or renter’s insurance
Installment payments to the IRS or New York State
Auto loan payments
Auto lease payments
Other secured loan payments
Mortgages other than your home
Maintenance costs for property other than your home
Alimony, child support, and maintenance
Health club memberships
All other expenses you actually pay
This section of the bankruptcy petition is not concerned with debt that is going to be discharged in your bankruptcy, such as credit cards or past due medical bills. It is concerned with your future expenses, such as mortgage, car payments and utility bills. The list above is not exhaustive. If you have expenses that you actually pay each month that are not included on this list, you should certainly let us know. For example, you may be paying continuing education expenses for your profession. Maybe one of your children is enrolled in gymnastics or music lessons. While some discretionary expenses will be scrutinized, it is still important that they be disclosed. Every trustee and judge has a different perspective on what constitutes an “allowable” expense. In general we find that the local bankruptcy judges are fairly sympathetic to any reasonable expense for the household. In our experience, budgets are more carefully scrutinized in the Rochester district. However, this tends to be more of an issue in Chapter 13 cases than in Chapter 7
cases, unless your income is above the median income or the Court finds that your
bankruptcy filing overall lacks good faith.
If you anticipate changes in your expenses going forward, this is something that should be disclosed as well. For example, you may have a car loan that will be paid off in six months, or you may be a new mother returning to work and anticipate incurring significant child care expenses. Any meaningful change in expenses (either up or down) will be listed on the expense page of your bankruptcy petition.