A CLIENT wants Chapter 7, but can he avoid the presumption of abuse?
The client is 55, married with a son and daughter who have just entered college. His income is $5,600 gross a month. The wife’s income is $5,500 gross a month. So, the combined gross of his household of four is $11,100 a month. His income was actually higher than $5,600 a month until four months ago. Four months ago, his gross income was $6,700 a month. He suffered an income reduction of $1,100 mostly due to the evaporation of overtime. The employer decided to hire another person. That killed the overtime pay. He doesn’t own a house but with two children in college, there are a lot of additional expenses that did not exist before. For instance, he had to provide his son with a new car for college. He also gave his daughter a new car for college. Both cars are being leased. He himself is paying for a late model car, and his wife also drives a new car. Therefore, the client is paying for four new cars. At $500 per month for each car, the car payments total $2,000 per month. Car insurance for four new cars is almost $1,000 a month. So, four cars plus insurance, is about $3,000 a month.
Even if the household’s gross income is $11,100 a month, after taxes and other payroll deductions, net take-home pay for the household is about $8,000. After $3,000 of car payments, what is left is $5,000 for rent, food and other necessities. Rent is $1,500 so what is left is $3,500. Gasoline for four cars is at least $1,000, so what is left is $2,500. There are still food, medicals, and other stuff that have to be paid. After everything is paid, there’s really no disposable income left to pay for credit card debt, if any.
Unfortunately, client owes $40,000 of credit card debt. The wife owes only $10,000 of credit cards. The client’s $40,000 in credit cards require at least $1,200 of minimum payments to keep them current. Wife’s $10K of credit cards require at least $300 of minimum payments. There is no $1,200 and no $300 of disposable income left. So what happens now?
Well, certainly husband starts to default on the $40K, but the wife is still valiantly paying her $300 to keep her $10,000 of cards current. The client prefers to get a Chapter 7 fresh start and not pay any portion of the $40,000. The wife prefers to not file Chapter 7 for her $10,000. This is a good decision because $10,000 of cards is still manageable for them if the husband does get rid of his $40,000. Instead of $1,500, they only have to produce $300 to keep her cards current. If the husband is able to discharge $40,000 in Chapter 7, then the household would have reduced their credit card debts from $50,000 to $10,000 a reduction of 80 percent. That should be close enough to a fresh start for the family with only the major debtor spouse filing a Chapter 7.
But can client actually qualify for Chapter 7? If you consider that the median income for a family of 4 in California is $6,800 a month and compare that with client’s household income of $11,100, you can see that there’s going to be a problem overcoming or avoiding the presumption of abuse under the means test for Chapter 7. However, even if client’s income of over the median for a family of 4, if he has additional allowable deductions, he might still qualify for Chapter 7. For instance, if the client takes care of a parent by giving that parent $1K a month, the entire $1K is deductible; or, if there is a nondischargeable tax debt that is being paid by installment of $500 a month. That is also deductible. So just these two items can squeeze client through the means test if applicable because they can make any disposable income on the means test disappear altogether.
This kind of case requires a lot of detailed examination of what client’s monthly expenses are. It looks like the client has a 401K-loan repayment of $500 a month. In Chapter 7, the repayment of $500 cannot be deducted in the means test. But in Chapter 13, the $500 a month 401K-loan repayment is deductible in the means test analysis. I like to call this 401K-loan repayment paradox. Let’s say the presumption of abuse arises in this case and the disposable income that pops up is $500 a month. The client will not qualify for Chapter 7 because he has $500 of disposable income monthly. But in Chapter 13, we can deduct the $500 401K-loan repayment. Removing the $500 401K-loan repayment in Chapter 13 would actually make the client’s disposable income zero in Chapter 13, making client’s plan payment zero!
If this case is filed as Chapter 7, documentation of expenses must be complete. The $1,000 being sent to the mother must be fully documented. Otherwise, the U.S. Trustee may file a motion to dismiss for abuse of bankruptcy law. At that time, the client will have the option of converting to Chapter 13. So there is some gambling involved here. If the client has good documentation of expenses, he may be eligible for Chapter 7.
I just had a hearing on a Chapter 7 case where I informed the client that there was a possibility that because her income was over the median for a family of two, there could be some headwinds with the U.S. Trustee asking about her expenses. The client was 70 years old. She still works and makes $75,000 a year. She sends $2,000 a month to her 72-year-old husband who lives abroad. He doesn’t work and has diabetes and hypertension. The client was fortunate that her case went through smoothly without questions from the U.S. Trustee even though her income was over the median. This is a borderline Chapter 7 case that if there was inadequate documentation of expenses could have been dismissed or converted to Chapter 13. Each case has different circumstances and so may have different endings.
If you need debt relief, set an appointment to see me. I will analyze your case personally.
“Then he said this is what I’ll do. I will tear down my barns & build bigger ones, and there I will store all my supplies of grain. And I’ll say to myself, “You have plenty of grain laid up for many years. Take life easy, eat, drink & be merry.” “But God said to him “You fool! This very night your life will be demanded from you. Then who will get what you have prepared for yourself?” This is how will it be with whoever stores up thing for themselves but is not richtowards God.” Luke 12-21 (The parable of the foolish rich man told by Jesus)
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S. Fremont Ave, Mailstop 58, Building A-1 Suite 1125, Alhambra, CA 91803.