A reaffirmation is an official way to “reobligate” yourself on the loan. This involves the lender sending us a reaffirmation contract to be signed by you.
Is a Means Test Required for Both Chapter 7 and Chapter 13 Bankruptcy?
With chapter 13, the main question is: are you over the median income or under? If we can get you under the median income, we can potentially get you into a three-year plan. While that seems relatively simple, there are a lot of people out there who have incomes that fluctuate. If you are in sales and have commissions, what time of the year you file your case is going to determine what your six-month window is. Timing that out correctly so that your six-month projection reflects something more accurate than if you are just off of your busy season, when the means test is going to calculate a much higher income, is tricky.
A bankruptcy attorney should have the skills and knowledge to determine whether in a particular circumstance, it makes sense to wait a few months to file a chapter 13 case, to let more lower income months fill up the six-month. Because if chapter 13 is your only option, you may be able to get into a three-year plan as opposed to a five-year plan. Another instance where an accurate determination of your income is critical is if you are self-employed as a sole proprietor.
When the Bankruptcy Abuse Prevention and Consumer Protection Act, which was initiated by the banking industry and credit card lobbyists, was passed by Congress in 2005, it was a very poorly drafted amendment, and there were a lot of hanging paragraphs and things that were unclear, which had to be resolved in the courts. In fact, the judicial committee responsible for creating the bankruptcy forms had to make certain assumptions based on the legislative history and their knowledge of what the Bankruptcy Code’s motivations are and what the court is trying to accomplish. The forms are written so if you operate a business, the court is only looking at your personal gross income.
For example, let’s say I have an LLC and am a tax preparer. Every month the business makes $5,000, so my business gross is $5,000, but I have $1,000 of business expenses. At the end of the month, I put $4,000 in my pocket, which is my personal gross. I pay my personal income taxes based on that $4,000, not based on the $5,000 because the business has to pay the monthly expenses, and I base it on my personal gross. The bankruptcy forms were written to reflect that reality. Unfortunately, because of the convoluted way that the amendment was written, there is an argument to be made that this situation only applies if your self-employment has a legal entity attached to it. So if you’ve created an LLC, or a corporation or partnership, and you run your business through that partnership, where the legal entity of the business pays those business expenses, then on the forms, you are permitted to just list your personal gross.
However, if you operate your business as a sole proprietor and do it under your own name, you don’t have a separate business entity; then the argument can be made that you have to list your entire business gross because even though you have business expenses, it’s really not a separate legal entity paying those expenses. So listing out your entire gross may push you north of that median income, even though it’s not the money that you are getting, because you have to pay the business expenses to continue running the business. It can be very convoluted, so you definitely want to sit down with a seasoned bankruptcy attorney who knows these things and has the experience to make sure that you can get the bankruptcy that best suits your needs and goals to minimize any additional expense or time that you may not otherwise have to spend.
What Is The Next Step After Someone Passes The Means Test?
If I sit down with somebody at the free consultation, one of the things we discuss is their income, and I do ask that potential clients bring in a couple of recent paystubs so I’ve got some precise numbers and can run a quick calculation to project their annual gross and weigh it against the median income. If there’s not going to be any issue with the means test, then we just move forward, and I request the other documents. There are sometimes situations where it’s going to be very close, so I will just make an estimation at the free consultation, rather than running the numbers on the entire means test.
In that particular situation, I’d say to the person, “I think I can get you qualified for a chapter 7, but I am not entirely sure; please provide me the six months of paystubs, bank statements and other documentation we would need so I can run the exact numbers and let you know if we’re going to be able to get you into a chapter 7 with the means test.“ Usually, in those very close cases between a chapter 7 and a chapter 13, they’ll get me the documents, and I’ll be able to get back to them in about a week after running the numbers. At that point, they have to make a decision on what they want to do. Obviously, whatever they decide, we’d follow up with that decision.
For more information on Means Test For Chapter 7 & 13, a free initial consultation is your next best step. Get the information and legal answers you are seeking by calling today.
Chapter 13 is essentially a payment plan that you organize through the court system. Think of it as a consolidation loan with teeth.
There are 2 things you must do after your case is filed: (1) attend the meeting of creditors (aka the 341 hearing); and (2) complete a debtor’s education course via phone within 75 days from the date your case was filed. The 341 hearing is sometimes referred to as the meeting of creditors because your creditors can attend the meeting and ask you questions about the information contained in your petition.