2 major prerequisites for filing bankruptcy

May 22, 2017

By Robert D. Barr

The amendments to the Bankruptcy Code in 2005 instituted two major new prerequisites to filing any new chapter 7 or 13 case: a credit counseling requirement, and the completion of a means test.

1. Credit Counseling

The pre-filing credit counseling requirement (see 11 U.S.C. § 109(h)) is relatively simple. An individual debtor (or each joint debtor) must take a credit counseling course from an approved, non-profit agency within six months prior to the filing. The website of the Office of the U.S. Trustee lists approved agencies: http://www.usdoj.gov/ust/eo/bapcpa/ccde/cc_approved.htm

The courses generally range in price from $10.00 to $30.00 per person. Most courses can be completed online or over the phone. Each debtor must also take a financial management course within 45 days after the meeting of creditors (the initial hearing with the bankruptcy trustee).

2. The Means Test

The means test is basically a mathematical test used to determine whether an individual is entitled to chapter 7 relief. Also, it may be used to determine the minimum amount of payments made to creditors in a chapter 13 plan.

Generally, if the debtor makes less than the median income for a household in his or her state of the same size, he or she need not take the means test and there is no “presumption of abuse.” If the debtor’s income is higher, he or she needs to complete the means test form and, if at the end of the day, the debtor fails to meet a threshold test, there is a “presumption of abuse” and the Office of the United States Trustee may seek dismissal or conversion of the case.

A debtor whose debts are “primarily consumer debts” must complete the Form 22 means test. 11 U.S.C. § 101(8) defines a consumer debt as one incurred for personal, family or household use. “Primarily” means more than one-half of the dollar amount owed. In re Martinez, 171 B.R. 264, 266 (Bankr. N.D. Ohio 1994). Examples of consumer debts include credit cards, home mortgages, vehicle loans, and income taxes owed on wages.

Disabled veterans, whose indebtedness occurred primarily during a period of active duty, do not have to complete the means test.  

The first step is to calculate a client’s current monthly income. 11 U.S.C. § 101(10A) defines “current monthly income” as the debtor’s “average monthly income from all sources that the debtor receives (or in a joint case the debtor and the debtor’s spouse receive) without regard to whether such income is taxable income, derived during the six-month period ending on” the last day of the calendar month immediately preceding the petition date.

A debtor must include the gross income of a nondebtor spouse. See, e.g., Lynch v. Parrish, 382 B.R. 907 (E.D. N.C. 2008). If necessary, the non-debtor’s individual expenses (i.e., not used for the household expenses of the debtor and the debtor’s dependents) may be separately deducted (Form 22A, Line 17). However, if the case is not a joint case, and the spouses are separated or maintain separate households, then the income of the non-filing spouse may not be included. See § 707(b)(7)(B).

Income includes: gross wages, salary, tips, bonuses, overtime, commissions; income from the operation of a business (business expenses may be deducted); rent from real property; interest, dividends and royalties; pension and retirement income; contributions from others living in the household; and alimony (only if the spouse’s income is not being considered on the overall Calculation of Monthly Income).  

Robert D. Barr is an attorney with Koehler Fitzgerald LLC in Cleveland.



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