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June 10, 2010

Projected Monthly Income for Chapter 13 Purposes the New Supreme Court Opinion

Posted By Marc Wagman

When filing a bankruptcy either a Chapter 7 Learn More About Chapter 7or Chapter 13 Learn More about Chapter 13 a Debtor goes through the "Means Test" Learn More about the Means Test a provision changed by Congress in 2005 to determine under 11 USC 707 B 2 of the Bankruptcy Code whether the Debtor needs to file a Chapter 13 or a Chapter 7. In sum, the means test was written into the Bankruptcy Code by Congress based upon the perception that there are many people who should be filing a Chapter 13 instead of filing a Chapter 7. Congress perceived that some were abusing the relief provided under the bankruptcy code. No longer would your actual income and expenses determine your ability to file a bankruptcy.

The Means Test

The Means Test is a six month average of the Debtor's & Joint Debtor's household income derived from all sources for the six months prior to filing.     An average of the money received from all sources in the last six months is calculated divided by six then multiplied by 12 and you have the Median Income of the Debtor (the mathmatical formula) (6 months income derived from all sources prior to the filing for six months divided by the six months and multiplied by 12) you come up with Median Income of the Debtor and his or her household. If that amount of money is below the income for the size of household in your state then you can file a Chapter 7. If the money is higher than the average size per your household in the state you are "presumed" to do a Chapter 13 paying in any "projected disposable income" over the next five years minus any legitimate deductions. After legitimate deductions (only deductions Congress prescribed in 707) the number determines the payment in Chapter 13 for a sixty month repayment plan.

Whats the problem with that?

The problem is what happens if the Debtors six month pre-filing average is either very high or very low. The end number to determine the payment may abnormally high or low. So Some people who cannot pay their debts end up being forced into an unrealistic Chapter 13 payment due to loss of Income that they no longer receive or they are paying to little to the creditors.

This is exactly what happened in the Supreme Court Case Hamilton v. Lanning, just decided a few days ago.   The Debtor lost her jobs in the previous six months prior to filing and received a one time severance package just prior to filing. That income was a one-time occurence, but according to the means test that amount is calculated into your monthly average. She had a job paying lower than the median income post filing and that the previous amount of money pushed the Debtor into Chapter 13.

It fictionally made it appear that she had more money to pay her creditors. The Chapter 13 Trustee objected to her proposed repayment plan and said that she must pay her creditors based upon the income received in the last six months including her severance package without looking forward for her future income.

The Supreme Court said no, and

Held: when a bankruptcy court calculates a debtor’s projected disposable income, the court may account for changes in the debtor’s income or expenses that are known or virtually certain at the time of confirmation.

This means a great deal for Debtors who file bankruptcy.   The process of filing of bankruptcy Learn more about the process became more difficult with the change of the laws. Courts all over the country mainly used the mechanical approach toward calculating future income (mechanical meaning in essence that a math formula was used to calculate the Debtor projected payments). Now with an experienced bankruptcy attorney who files bankruptcy in Chicago Experienced Chicago Bankruptcy Attorney the Debtor can argue that something either in the past or future should be considered by the court.   I.E. a loss of income a one time withdraw from a pension, IRA, or a severance package etc. that should be taken out of the equation for calculating whether you should file a Chapter 7 or a Chapter 13. How to Choose a Lawyer Choosing the right lawyer is important now more than ever. At Swanson & Wagman LLC all we do is bankruptcy.

My partner and I are Experienced Chicago Bankruptcy Attorneys. We keep up to date with current case law and are aware of the requirements of the Bankruptcy Code for either Chapter 13 or Chapter 7. We will make the most of Chicago Bankruptcy filing whether Chapter 7 or Chapter 13 and help you navigate through this process as painlessly as possible. We want you to lose your debt and keep your dignity!

Marc

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