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Article added or updated:
01/06/2008 |
Bankruptcy Quiz: Passing the Means Test
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Article added: 1/29/2007
Author:Leon D. Bayer
copyright Bayer, Wishman & Leotta, 2006. All rights reserved.
Related Articles:
Bankruptcy Q&A
Bankruptcy Test
Bankruptcy Still Works
Have you ever known someone who was out of work and
running desperately short of money? Was there ever a time when you
yourself had to be late on a bill because you just didn’t have enough
money to pay it? Most people have been there at some point in their
lives and survived it. Salvation may come in the form of a tax refund, a
new job, or a bail-out from relatives. One way or another, most of us
manage to weather the storm. But what happens when a personal money
problem has grown into something so big that it has no end in sight?
When things get as bad as that, you just might start thinking about
bankruptcy.
Filing bankruptcy usually brings people immediate,
automatic relief by stopping the pressure from bill collectors. In 2005
approximately 2 million people actually resorted to filing for
bankruptcy protection.
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are three life altering events that seem to put people at a higher risk
of bankruptcy than anything else: unemployment, serious illness, and
divorce. Tell me, who hasn’t experienced at least one of these? There is
a lesson here. This can happen to anyone, it can even happen to you.
Most people who can’t pay their debts are in that predicament because
they got divorced, lost a job or became too ill to work. They didn’t
choose that fate, and almost all of them incurred their debts during a
time when they had the money to repay what they have borrowed. As we all
find out, things in life can change. Very few of us are blessed with a
lifetime job, a lifetime of good health, and a lifetime of happy
marriage. The loss of just one of these pillars can be financially
devastating, and leads many people down a path that results in filing
bankruptcy.
In the early stages of a debt crisis, people are usually
in denial that they have a debt problem. They borrow from "Peter to pay
Paul," often transferring debt balances from one credit card to pay off
another. In the later stages of a debt crisis, the game becomes a
miserable struggle of juggling overdue payments. Debtors desperately
negotiate with bill collectors for more time to pay by making new
promises that are often impossible for the debtor to keep. For most
folks who wind up in bankruptcy, this is the point where the house of
cards finally crumbles down on them.
In the end game of the debt struggle, the tactics
exerted by many bill collectors will ratchet up into a humiliating
verbal assault that leaves many debtors holding their phones and weeping
in tears. Despite laws banning such tactics, bill collectors barrage the
debtor with harassing phone calls at home and work that are cunningly
designed to scare your daylights out. The final collection pitches are
often a forceful combination punch that threatens the debtor with
immediate fearsome legal actions, combined with insults and heaps of
personal abuse. There are very few people that can stand up to that kind
of pressure without cracking. This is the point when many debtors make
the unwanted decision to throw in the towel and file for personal
bankruptcy. What else can they do if they really can’t pay?
Bankruptcy laws in the U.S. have evolved over time to
provide a safe harbor where the honest but unfortunate debtor may be
allowed to discharge most kinds of debts. The actual process entails a
fairly complex legal inquiry that is conducted in a United States
Bankruptcy Court. In simple terms, the process takes place by
demonstrating that one’s debts were incurred under honest good faith
circumstances and that one is truly unable to pay back any of the money.
Debts that are owed for family support, taxes, intentional wrongs and
educational loans are generally not discharged and will usually remain
owing. There is also a bankruptcy procedure that may allow someone to
reorganize and pay back what they owe over time, with much better terms
and sometimes with no interest.
A complex new bankruptcy law took effect on October 17,
2005. The new law contains a "means test" that seeks to artificially
determine who is entitled to be forgiven, and who isn’t. The new law
divides everyone into two classes: Those who earn above the median level
of income in the state where they live, and those who earn below it. For
those with an income below their statewide median and who have
comparatively simple debt problems, a bankruptcy case generally works
out to produce a result that is pretty much the same as what it used to
be, (albeit with a lot more legal work and expense than there ever used
to be.)
For those with an income above their statewide median,
relief might still be granted but the bankruptcy calculus moves to a
complex computation in which a combination of certain actual living
expenses and certain
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Hypothetical living expenses are subtracted from the
debtor’s average monthly income that was received during the previous
six months. This kind of debtor seeking bankruptcy relief may be
required to give creditors all of the their projected disposable income
for the next 5 years if the result of the "means test" shows that there
would be even just a little bit of money left over.
On the surface, this process may look fair enough. Those
who can pay something shouldn’t get a free ride. But in reality, the new
"means test" has some very serious failings. For one thing, the
eligibility process is anchored on a mathematical model of certain
actual and hypothetical living expenses. The hypothetical living
expenses that the law requires the court to impose for conducting this
"test" is mandated to be the exact same collection standards that the
IRS currently uses as a punitive measure to collect money from tax
evaders.
The "means test" is squarely at odds with giving
deserving folks a fresh start. A bankruptcy system that determines
eligibility by using the collection standards borrowed from the world’s
largest collection agency, (the IRS) is neither reasonable nor fair
because it is imposed upon people who can prove in court that they are
"honest but unfortunate." Even if the result of the "means test" shows
that a person does have some left over income, that determination is
still the product of using hypothetical expenses, rather than a person’s
real expenses. In reality someone who is dead broke might show
"disposable income" under the means test. That is because the means test
was formulated by the IRS as a punitive tool to maximize debt
collections, whereas modern American bankruptcy law was created to give
people a fresh start.
Another pitfall for the unwary is that the "means test"
relies on average income that the debtor received over the previous six
months. Someone who has just lost a job doesn’t have as much income as
they used to have even six months earlier. That’s one reason why they
seek bankruptcy. A person who has suddenly lost a job or become disabled
may be kept from filing what would have been a good faith bankruptcy
case because the "means test" is imposed on their previous income, not
the income that they have now. Moreover, the variance in "means test"
median income from one state to another can be huge and makes for
inherently unequal results.
Here is an astounding fact: A person living in one state
may pass the test even though that person has $20,000 more income
then someone who fails the test and lives in a different state. Because
of inequalities in the "means test" an American citizen living in
Connecticut can be allowed to file bankruptcy and still earn about
$20,000 more than someone who fails the test and lives in storm
ravaged Louisiana.
The median income cutoff to avoid the "means test" for a
single person living in Louisiana is currently $31,968. The median
income cutoff for a single person living in Connecticut is $51,877. The
inequality is obvious when used to determine who can file bankruptcy.
Article 1, Section 8 of the U.S. Constitution requires that the
bankruptcy laws passed by Congress are required to be "uniform among the
states." The misplaced reliance on median statewide incomes for the
bankruptcy "means test" is hardly a "uniform law among the states" as
the Constitution requires it to be. Bankruptcy relief for someone in
Connecticut may be a world easier than it is going to be for someone
living in post-Katrina Louisiana.
The current bankruptcy law was enacted at the behest of
Big Money, namely the collection departments of the credit card banks
and the major auto lenders. In the recent past, similar legislation was
vetoed twice by President Clinton. Last year, the Congress, and an
administration that has never owned a veto pen, both sold out to the
debt collection industry, (just follow the trail of campaign donation
money) and together they enacted a new law that gave the bill collectors
virtually everything they had asked for. The current bankruptcy law is
now one year old, and it is a bill collector’s dream come true. Happy
birthday, Bankruptcy!
Related Articles:
Bankruptcy Q&A
Bankruptcy Test
Bankruptcy Still
Works
The writer is Leon D. Bayer. He is a Certified
Bankruptcy Specialist who primarily represents individuals in bankruptcy
cases. He has practiced bankruptcy law in Los Angeles for 27 years. He
is a Partner in the Law Firm of Bayer, Wishman & Leotta. Email him at
iinfo@www.debt-relief-bankruptcy.com,
web site at
www.debt-relief-bankruptcy.com.
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