Bankruptcy Standards

New Bankruptcy Means Test Amounts - Effective November, 2016

The U.S. Department of Justice has published new median, gross income data for use in bankruptcy cases filed on or after November 1, 2016. For Minnesota residents, the figures have increased, making it more likely that you will qualify for Chapter 7 relief.

The new figures are available on the Means Testing section of this site. The numbers for all federal districts as of November 1st are available on the DOJ's website.

Here is how much the median amounts will increase in Minnesota from numbers used in cases filed between April 1, 2016 and October 31, 2016:

  • One person household: +$867 (from $51,260 to $52,127)

  • Two person household: +$1,410 (from $68,596 to $70,006)

  • Three person household: +$3,074 (from $80,900 to $83,974)

  • Four person household: +$1,930 (from $98,564 to $100,494)

The increase for additional household members above the first four remains the same, at $8,400.

A reminder: the median income amounts are only part of the analysis for determining whether you qualify for Chapter 7 relief. You can sometimes be over the amount and still qualify after completing the full, long-form means test. How to count household income can be tricky as well, depending on sources (social security benefits do not count, for instance) along with the amounts that are contributed by other household members. And calculating your household size is not aways as straightforward as you might think.

As always, consultation with a qualified, experienced bankruptcy attorney is critical. But if you're struggling with debts, starting next month it is going to get a little easier to qualify for relief.

About the author: Dan Cooke

Image credit: Cafe Credit

How to Protect Retirement Savings from Creditors

Think your retirement savings are safe? If you are behind on bills, can your creditors take your pension or other retirement savings from you?

For the most part they can't. But there are some exceptions, at least in Minnesota. The key thing you need to know is whether your savings are in an ERISA-qualified plan.

ERISA is the federal "Employee Retirement Income Security Act." ERISA-qualified 401(k) and pension plans are protected by federal law. Creditors cannot garnish funds in ERISA-qualified plans, except in very limited situations (federal tax debts, debts related to federal crimes, and domestic support 'QDRO' orders to split retirement funds are the primary exceptions). How do you know if your plan is ERISA-qualified? Ask the plan administrator. This is normally the HR or payroll person if the plan was set up by an employer. You can also try running a basic search for your plan at the FreeERISA website. But you should still check with the plan administrator to make sure.

The problem is that not all retirement savings plans are covered by ERISA. Most IRA's, for instance, do not fall under ERISA protection (rollovers and employer-created IRA's can be covered but most IRAs are not created this way). It's uncommon, but some pension plans are also not ERISA-qualified.

For any savings you have that are not covered by ERISA, you're going to have to look for other laws to protect those funds. Minnesota has a law protecting retirement savings, but it only provides protection up to a present value of $69,000. And that's the combined value of all of your non-ERISA-qualified savings, not a per plan amount. This amount comes from Minnesota Statute Section 550.37, Subd. 24, as adjusted by the Minnesota Department of Commerce. The number doesn't change very often.

This means that an aggressive creditor could get every penny of your retirement savings, minus the first $69,000! So knowing whether your retirement plans are ERISA-qualified is critical.

This all assumes that you are not filing for bankruptcy protection. Bankruptcy is complex, but it can often provide additional protections for retirement savings. If you're at all concerned about losing your nest egg, give us a call. We can discuss your situation and talk about how bankruptcy might help.

About the author: Dan Cooke

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Filing Bankruptcy - What to File (#2 in a series)

"I declare bankruptcy!" - Michael Scott.

When Michael Scott, manager of the Scranton, PA branch of Dunder Mifflin Paper Company ran into debt issues, he figured bankruptcy might be a way out. He was right about his options but he was dead wrong about what it takes. Standing up tall in public and saying that you "declare bankruptcy" ain't gonna cut it. (Michael Scott, if you don't know, is a fictional character from the U.S. version of the television comedy "The Office" & if you need a laugh you might want to check it out).

Unless you live in a smaller community or your local newspaper still lists recent bankruptcy filings, normally no one but your lawyer and your creditors will know that you filed. Trustworthy, confidential support is valuable when you're dealing with debt. But, thankfully, you don't have to declare your intentions to your friends or even your family if you don't want to.

What you really need once you've decided that bankruptcy is the right move for you or your business is a big stack of forms.

In most situations the most valuable thing a lawyer can offer a client is counsel. Clear information and guidance about the law and its impact on whatever the client is facing, delivered with respect for the client's needs and wishes, is a lawyer's most valuable commodity. But a close runner-up in the value department in a bankruptcy law office is an understanding of how to fill out the forms and supporting documents required to start a bankruptcy case.

The stack begins with the bankruptcy "Petition." This is a relatively short (usually three- or four-page) document that contains a series of elections and signature lines. After the Petition and any Exhibits attached to it comes a long set of "Schedules" that are required in every bankruptcy case. Each Schedule deals with a different aspect of your finances, ranging from assets owned, to household income and expenses, to a correct and complete listing of your debts, separated into appropriate categories. The opportunities for mistakes on your schedules -- particularly in how you list and exempt your assets -- are lurking everywhere. This can make filling out the Schedules somewhat stressful.

But let's say you wanted to try your hand at filling out the Petition and Schedules on your own. You can get blank copies of the forms from the bankruptcy court clerk's office in your federal district. The "Petition" and "Schedules" portions of the bankruptcy papers work out to being about ten times longer than a complex tax return. If the case is simple enough, someone might be able to complete the Petition and Schedules with reasonable accuracy in ten to twenty hours. If you're lucky you might not even make any crucial mistakes.

But the stack doesn't stop there. After the Schedules are completed, you have to fill out a series of "Statements" about your finances and your financial history, including the lengthy "Statement of Financial Affairs", which contains a set of compound and sometimes confusing questions. And there are more questions for those with past or current business ventures.

And it doesn't end there. Even if you get through those forms with any sense that you've done it right, you still have to work your way through the bankruptcy means test. This is perhaps the most confusing form of all, because it requires you to know a great deal about both the federal standards used to determine how your money is counted and compared with the applicable median and what the local district court clerks expect to see on the form.

After all of that, you'll still have to compile another set of supporting documents. In most districts this includes properly-redacted pay records, separate signature forms, properly-formatted electronic listings of your creditors, certificates, etc. It's more than enough to make your head spin.

My point? If you haven't figured it out yet, what I'm saying is that if you want to try to prepare your own bankruptcy forms you're in for a world of pain. And even then you're likely to make one or more big mistakes that may force you to pay more money down the road when you need to try to convince a lawyer to help clean up any messes, assuming they are the kind that can be cleaned up. Believe me, lawyers do not like doing this and many won't even touch a case that was filed incorrectly.

I'm obviously biased here but bankruptcy lawyers -- and their well-trained staffs -- are incredibly valuable when it comes to their knowledge and understanding of the complex and lengthy bankruptcy paperwork. Don't believe me? Our District's website provides some helpful information about the forms, which should be enough to give you a sense of the amount of work involved. And if you absolutely, positively cannot afford to pay a lawyer a nickel for help, there are other resources out there where you can start. Because when it comes to filing the proper documents, you really shouldn't go it alone.

Next up in the series: Who files?

About the author: Dan Cooke

Image credit: Carl Malamud

Filing Bankruptcy - Where to File (#1 of a series)

Ask any good journalist how to tell a story and they'll say you need to make sure to cover five things: where, what, who, why, and how.

I'm starting this series to cover all of the basics of filing bankruptcy. We're going to start with something that's usually simple, but not always: Where do you file?

Bankruptcy is a federal proceeding, so the paperwork is going to be filed in a United States federal court. Federal courts are broken up into "districts", with each State and federal territory having one or more different federal districts (California, for instance, is broken up into four federal districts). Selecting the district to file in is sometimes called choosing a "venue" for your case. In Minnesota there is only one federal district court. If you're filing in Minnesota you file in Minnesota's one and only federal district court and that's your "venue."

So if you live in Minnesota your bankruptcy paperwork is filed with the federal court for the "District of Minnesota" and that's it - done deal, right? Well, maybe not. You still have to have lived in Minnesota for the majority of the last 180 days. So if you recently moved or are planning to move to or from Minnesota, you're going to have an option. For instance, if you are moving to Nebraska, you can either file in Minnesota up to 89 days after your move or wait until 91 days after you move and file in Nebraska.

Even if you haven't moved recently, you don't necessarily have to file where you live. You can also file in the district court where you have your primary place of business or where you have owned your "principal assets" for the better part of the last 180 days. So if you are currently living in Minnesota but own a business in Iowa and have your most valuable assets in Arizona, you can file in Minnesota, Iowa, or Arizona. And you get to choose.

And your choice may not end there! If you have a family member, partner or affiliate who also filed for bankruptcy protection, you can choose to file in the same district where that other case is pending. And if you do not have a business or principal assets in the U.S. but are being sued by someone in the U.S., you can even choose to file bankruptcy in the district where you are being sued.

At this point you may be asking why any of this matters. Besides the convenience of being able to choose where to go to court for your bankruptcy meeting, aren't the bankruptcy laws the same no matter where you file? For the most part they are but there can be important differences.

First, there are state laws that come into play in almost every bankruptcy case. The most important of these are the exemption laws that determine whether you have to turn over any of your property to the bankruptcy trustee. The test for which exemption laws apply is actually different than the venue test and looks back to where you were living between two and three years ago. But you can control this by deciding when to file your case. The important thing to know is that the state exemption laws are different, sometimes dramatically so. And even if you don't own much, you're going to want to make sure that the laws that apply in your case will protect as much as possible of what you own (ideally all of it).

Second, courts, judges and bankruptcy trustees have different procedures around the country. And even though the bankruptcy laws are the same, they can be interpreted differently in different parts of the country.

So the choice of where you file can have a big impact. If you've always lived and worked in Minnesota and never leave the Land of 10,000 lakes except for an occasional vacation, you may not have a choice to make. But many people are surprised to learn that they have an option. And making a wise choice can have a huge impact on the outcome of the case.

Next up: What to File.

About the author: Dan Cooke

Means Testing: How many people live in your house?

If you are trying to determine what kind of bankruptcy relief you qualify for, figuring out how many people live in your house can make a world of difference. The lawmakers have unfortunately made this a difficult question to answer. And a recent decision by the Fourth Circuit Court of Appeals has further complicated the issue.

First, some background. Regular folks filing for bankruptcy protection -- meaning people with primarily consumer debts like credit cards, medical bills, car loans and mortgages -- have to submit to "means testing" to qualify for relief. The means test compares your household income over a recent time period with the median income levels in your State for your household size. There are plenty of complexities in the income calculation (which is just one reason why it is essential to have the assistance of a competent bankruptcy attorney when running the test).

But the household size part of the calculation should be easy, right? If you live alone then your household size is one. And if you are married and have two kids then your household size is four, right? Unfortunately, it's often not that simple.

The biggest problem is that the bankruptcy laws passed by Congress do not define what "household size" means. They've essentially left it to the courts to figure that one out. There are three ways that courts have calculated the household size in a bankruptcy case: (1) The "income tax dependent" approach where the court looks at how many dependents are claimed on the filer's tax return (which can be problematic after a divorce where one spouse has custody but the parents agree to split or alternate the tax dependent claims for the kids), (2) the "heads on a bed" approach where the court simply counts how many people live and sleep in the home, and (3) the more complex "economic unit" approach which attempts to add up the people in the home who are a factor in the household economy.

Minnesota cases filed since the means test went into effect have largely followed the "heads on a bed" approach. The test has the advantage of being relatively simple: if grandchild lives with you or if you have a renter that shares your home, you count those people as part of your household size.

But until we have nationwide agreement or a Supreme Court decision resolving the issue, bankruptcy filers should be aware of the risks of relying on "heads on a bed" counting method. The Fourth Circuit Court of Appeals, in a case that was filed in North Carolina, adopted a very complex "economic unit" approach where they calculated exactly how long each person lived in the home. In that case, there were children and stepchildren who did not live in the house year-round. The calculation only counted a fraction of each child to determine the "household size," which meant that the bankruptcy filer ended up flunking the means test.

Commentators have already criticized the complexity of the court's calculations in that case. But if you live in Minnesota, the important thing to take away from the decision is knowing that "household size" is not a settled issue and you cannot necessarily rely on the "heads on a bed" counting method. Laws and their interpretations change and this is an unsettled area. Having an experienced bankruptcy attorney go over these issues for you is your best bet, particularly when courts cannot agree on how to count up the number of people in your household.

About the author: Dan Cooke