Disabled Veteran Exclusion on Means Test

Chester County has a lot of active duty, former, and retired military.  707(b)(2)(D) allows for disabled veterans to be excluded from "means testing".  

First, what is disabled?  The code states that a veteran is considered disabled if they are 30% or more disabled (as rated by the VA) and you were discharged/retired from the military because of the disability.  For example, my friend Paul Lang is a Bucks County criminal defense lawyer and is retired military.  He would be considered disabled because he received a medical retirement.  

But, you cant' stop there.  You must also have incurred your debt "while on active duty or performing a homeland defense activity". This is where the means test exclusion gets tough -- frequently, the debt may be older than even their active duty time.  But, if you had debt in the service, got injured, left the service because of the injury, you can then be excluded from a means test for Chapter 7 purposes. 

Not Done Yet!   

This is important because, if you are working (or your spouse is) and you are receiving VA benefits (which are included in the means), you may not qualify for a Chapter 7 normally.  Still, if you are exempt from the means test, you will still have to show that your disposable income (as calculated by Schedules I and J) is still minimal.   

A Chester County debtor should advise their attorney about any prior filings.  In addition, just to be safe, a Chester County bankruptcy lawyer should also ask their clients and check the PACER system to see if the person has filed before.  Why is this important?  

For starters, you have to disclose it to the Bankruptcy Trustee.  Also, you must know there are potential restrictions on a person who has previously filed.  A person cannot file a subsequent Chapter 7 for 8 years after the discharge date of their prior bankruptcy.  A person may have a limited automatic stay if they previously filed a Chapter 13 within a year.  A person may have a "no-discharge" Chapter 13 if they received a Chapter 7 discharge within the past 6 years.  

As you can see, even if you don't remember the rules, you must remember one thing -- tell your Chester County bankruptcy attorney about your prior filings.  

Federal law under the bankruptcy code allows for each state to have its own exemption laws that creates a wide disparity among states as to the generosity of those provisions. Under section 522(b)(1) and (b)(2), a debtor may choose either the federal or state exemptions. Unless the state law that is applicable to the debtor specifically does not so author rise their choice. Congress granted each state legislature the option to determine if those subject to that states laws would be able to choose the federal exemptions.  

As discussed, this state option is known as the "opt out" rule which resulted between a compromise of the United States Senate and the House bills containing exemption proposals (yes, there used to be compromise!). The historical background regarding this compromise is quite interesting and quirky, as there's been virtually no legislative history behind the compromise. By opting out, a state restricts the bankruptcy debtors within that particular state's authority from the use of the bankruptcy code exemptions and permits only the use of federal non-bankruptcy exemptions in those state exemptions. The loss the opt out provision results in a narrower choice for bankruptcy debtors in opt out states than for those in states that have not opted out. Pennsylvania has not opted out and your Chester County bankruptcy lawyer should advise you of the options you have between "state exemptions" or "federal exemptions".   

This variation in choices from state to state introduces an argument that the federal bankruptcy laws are not applied uniformly to all debtors. The opt out by state legislatures restricts a debtor to the exemption of property understate law and non-bankruptcy federal law. In addition, a debtor restricted to state and non-bankruptcy federal exemptions may claim those exemptions connected to tenancy by entirety or joint tenancy. These tenancy exemptions are discussed more in a future blog post. Moreover, a debtor, whether or not subject to the opt out, may also claim an exemption in those retirement funds exempt. The fact that the opt out results in the application of state rather than federal exemptions means that the bankruptcy court will look to the applicable domicile state law for the applicable exemptions. It should be noted that the states exemptions must be available to a debtor whether or not the debtor isn't in bankruptcy. Finally, by the opt out present provision, Congress did not invite states to adopt bankruptcy only exemptions.

Local Bankruptcy Rules in Chester County

We previously discussed last month the first part of Local Rule 2083-1 of Chapter 13.  Here are the rest of the pertinent rules.

(e)  Standing Trustee's Fee.  If a Chapter 13 case is dimissed or converted prior to the entry of a discharge, whether or not a plan has been confirmed, the standing trustee shall be entitled to retain (i) from any payments made from the debtor the amount of $35 or the amount of the percentage fee authorized under 28 U.S.C. Section 586(e)(1), whichever amount is greater, and (ii) the interest earned on any payment from the debtor.  

(f)  Monthly Disbursements.  The Trustee shall make post-confirmation disbursements to creditors on a monthly basis.  

(g)  Final Account.  On the termination of a Chapter 13 case, the trustee shall file with the clerk a final account of all monies received and disbursed, and shall mail a copy of the final account to the debtor and counsel for the debtor.  

(h) Notice of Dismissal.  The clerk shall provide timely notice of the dismissal of a Chapter 13 case to all creditors on the Matrix List of Creditors and to the trustee.  

Note:  For those interested, here's 28 U.S.C. Section 586(e)(1):

(e) (1) The Attorney General, after consultation with a United States trustee that has appointed an individual under subsection (b) of this section to serve as standing trustee in cases under chapter 12 or 13 of title 11, shall fix—

(i) an amount not to exceed the highest annual rate of basic pay in effect for level V of the Executive Schedule; and

(ii) the cash value of employment benefits comparable to the employment benefits provided by the United States to individuals who are employed by the United States at the same rate of basic pay to perform similar services during the same period of time; and

(i) in the case of a debtor who is not a family farmer, ten percent; or

(ii) in the case of a debtor who is a family farmer, the sum of—

(I) not to exceed ten percent of the payments made under the plan of such debtor, with respect to payments in an aggregate amount not to exceed $450,000; and

(II) three percent of payments made under the plan of such debtor, with respect to payments made after the aggregate amount of payments made under the plan exceeds $450,000;

based on such maximum annual compensation and the actual, necessary expenses incurred by such individual as standing trustee.

I was talking to my friend, a Bucks County Bankruptcy Lawyer, and we were discussing the plight of filing a bankruptcy for an individual who has a ton of student debt.  

The tough thing is -- it is very, very hard to get student loans discharged in a bankruptcy.  It is a shame, actually.  A person must be unable to work (for the rest of their life, essentially).  About one in nine student loans are behind.  

As the Center for American Progress notes, 

Some members of Congress have proposed legislation that would again permit private student loans to be discharged more readily in bankruptcy, effectively making student loans equal to credit card debt. This is a start because there are major concerns with the private loan market, including interest rates as high as 19 percent. But the proposal ignores the reality that not all private loans are bad and not all federal loans are ultimately good for borrowers. Case in point: Federal student loans are available for programs that have very poor employment outcomes. Moreover, not all federal loans have the same borrower protections across loan programs. Income-based repayment options, for example, which take into account a borrower’s earnings and ultimately forgive the remaining balance after years of payments, often make it easier for borrowers to meet their living expenses and pay off at least a portion of their student loans. But parents using Parent Loans for Undergraduate Students, or PLUS, loans to borrow for a child’s education are generally excluded from using the income-based repayment benefit.

Primary Income on a Means Test

As you can guess, income on the means test is primarily comprised of an debtor and their household's wages.  This is included on Line 2 as gross wages, salary, tips, bonuses, overtime and commissions.  Keep in mind -- this is gross income.  This income is measure for the "last 6 months", which includes the last day of the calendar month prior to the filing of the petition (and back 6 months).  All income is included, whether it is taxable or not.  

Income from the operation of a business, profession or farm is still included.  This is calculated by taking the "gross receipts" and subtracting "ordinary and necessary expenses".  Again, this is captured over the last 6 months.  

More Income on the Means Test

The number of the means test cannot be negative -- so, you can't take a loss and try to apply that to other wages to lower that number.  Expenses cannot be personal income taxes, a company vehicle, or paper losses (i.e. depreciation or mileage rates).  

Rent and other real property income is also calculated as income.  Again, you would take the gross receipts from the last 6 months and subtract the ordinary and necessary business expenses.  This is on Line 4 of the Means Test.  Same as a business income, you cannot have a negative number.  

Interest, dividends, and royalties are also included as income.  This includes any generating assets, from CD's, mutual funds, etc.  

Remember -- you are not going at this alone.  You must rely on your Chester County bankruptcy lawyer to ensure that you calculate the means test properly and include all income.  

Chapter 7 Means Test

When a person is looking to file a Chapter 7 bankruptcy in Chester County, they must be qualify on the "means test".  It is a scary term (is it "mean" to people?) and sometimes imposing.  Here is some background:

A person in Chester County and file a Chapter 7 first if their debt is primarily consumer debt.  Debts are divided into consumer, business, and neither (i.e. taxes).  This comes under 707(b)(1) of the Bankruptcy Code.  The total debt is consumer debt when "more than 50%" of the total debt is primarily debt.  Consumer debt is normally personal, family or household debt and also includes mortgage debt.  In the past, some Trustees tried to count the number of debts, rather than their percent.  That has been determined to be improper.  

Expenses in a Chapter 7 Means Test

Expenses are taken from tables that must be current the day of filing.  These expenses are broken down by the national standard, local standard, and other necessary expense deductions under the IRS expense figures.  They are pegged to the "household size", which includes the Chester County debtor, spouse, and dependents.  

Companions or emancipated children are not to be used to calculate expense figures -- the basic standard is if they are not listed as dependents on a tax return, they cannot be used (see In re O'Conner, 2008 WL 4516374 where the court excluded an adult nephew in the household).  This is a troubling issue for most Chester County bankruptcy lawyers because the actual number of people in a household (especially in this type of economy where adult children are living at home longer) can be different from the number of people that you can apply the household exemptions.  

Other necessary expenses have to meet the "Necessary Expense Test", that includes expenses used for the health and welfare of the household or be used for the "production of income" (i.e. expenses you use to maintain your business).  

Local Bankruptcy Rules in Chester County

There are federal bankruptcy rules and some jurisdictions have local bankruptcy rules.  Under Local Rule 2083-1, the following information pertains to a Chapter 13 bankruptcy.  If you have questions, you should be calling your Chester County bankruptcy lawyer.  The first portion is,

(a)  Form of Plan Payment.  Payments to the Chapter 13 Trustee under Section 1326(a) of the Code or under a confirmed plan shall be made by certified check or money order.  Each payment shall be legibly marked with the bankruptcy number of the case and with the name of the debtor as that name appears in the caption of the case.  

(b)  Duration of Payments.  Payments to the trustee under Section 1326(a) of the Code or under a confirmed plan shall continue until an order is entered dismissing or converting the case, the debtor completes all payments required by the plan, the debtor files a motion for discharge or dismissal, or the debtor files a notice of conversion under Section 1307(a).

(c)  Effect of Wage Order.  The debtor shall continue to make the payments required under subdivision (b) even if the debtor files a motion for a wage order or a wage order is entered, unless the debtor's employer or other entity subject to the wage order makes the payment to the trustee.  

(d)  Transmission of Copy of Local Rule.  The Chapter 13 trustee shall mail a copy or a summary of this rule to the debtor [the person who filed a Chapter 13 bankruptcy] and counsel for debtor [meaning your Chester County bankruptcy lawyer].  

There are two types of discharges in a Chapter 13.  The first type of discharge is a successful plan discharge where the debtor has completed all payments under their confirmed plan.  This discharge is referred to as a section 1328(a) discharge.  The other type of discharge is a "best efforts" discharge that is granted even when a debtor was unable to complete the payments under the plan due to circumstances for which the debtor should not be held accountable.  This is a 1328(b) discharge.  

After the completion of all plan payments, a court order is granted to the debtor.  In the 1328(a) discharge, which is must more common, the discharge allows a debtor to discharge all debts except:

• debts not provide for by the plan
• debts whose last payment is due after the final payment date for the plan
• debts for embezzlement, larceny or fiduciary fraud
• debts for domestic support obligations
• debts incurred during the bankruptcy
• debts for student loans
• most tax debts'debts for death or personal injury caused by the debtors operation of a motor vehicle while intoxicated
• debts for restitution or a criminal fine included in a sentence on the debtor for conviction of a crime
• debts for restitution in a civil action that were caused by "willful or malicious injury by the debtor that caused personal injury or death to another

A 1328(b) discharge is much more rare and you should seek the help of your Chester County bankruptcy lawyer for guidance on the rules pursuant to 11 U.S.C. 1328(b).  But, it should be known that if you get this type of discharge, you will be discharged from all debts except:

• secured debts
• unsecured debts not provided for in the plan
• unsecured debts whose last payment is due after the final payment date for the plan
• post-petition debts
• and others that you should talk to your lawyer about

Bankruptcy is a paperwork intensive area of law.  Frequently, people retain a Chester County bankruptcy lawyer just to help and facilitate the process.  

You must confirm all of this with your attorney, but at a minimum you should have:

• Photo identification issued by a governmental authority
• Your Social Security card or an original W-2
• Last 2 months of all of your bank statements
• Last 6 months of all paystubs
• Statement of your mortgage balance
• Statement of your car loan balance
• Statements for all investment accounts (including retirement accounts)
• Last two years of tax returns

You should start gathering this information immediately to facilitate your bankruptcy filing.