December 2007 Archives

December 21, 2007

Means Test Changes May Help Some Consumers, Hurt Others in 2008

If you're a high-income individual living alone and thinking about bankruptcy, you may want to think faster. You may be affected by changes in the means test that take effect in 2008.

Significant Changes in Expense Deductions & Forms Beginning January 1, 2008

Under the new "Expense Allowance" standards used by the bankruptcy courts to determine eligibility, individual filers with above-state-median incomes (say $6,000 per month) will see their monthly means test expense deductions fall by more than $400 per month (from $916 to $494). Such a drop may change the qualification status of many individual filers.

Others, especially those with lower incomes, may actually benefit from the changes. For the lowest income debtors, expense deductions are higher by more than $400 per month. Others may not be affected at all.

Let's take a closer look at all the changes.

Note: Line number references are to Form B22A -- the Chapter 7 means test form, (followed by the line number for Form B22C -- the Chapter 13 form).

Living Expense Deduction No Longer Rises With Income

Perhaps the biggest change coming January 1st is not in the forms, but rather in the tables you use with them -- specifically the "living expense" allowance tables. (For those of you following along at home on Form B22A (B22C), this is the expense deduction amount that goes on line 19 (24) -- soon to be Line 19A (24A). More on that below.)

Bankruptcy courts are required by law to use the IRS's collection standards as part of the means test formula to determine eligibility for a Chapter 7 bankruptcy liquidation, and, for those debtors with income above the state median, to establish a minimum monthly payment requirement if you decide to go with a Chapter 13 repayment plan.

The IRS revises and publishes these "expense allowances" about every six months. They form the foundation of the means test: to determine whether your income is sufficient to pay off any significant part of your debt. But the latest revisions involve far more than just changed dollar amounts. This time, the IRS has fundamentally changed how they compute the living expense allowance that forms the basis of the one of the largest deductions in the bankruptcy means test calculation.

It may surprise some to learn that, under existing standards -- at least until the end of 2007 -- the higher your income, the more generous the amount of the means test living expense deduction. For example, a family of four scraping by on $2,200 a month gets a living expense deduction of $941 while a family earning $4,200 per month gets a $1,203 deduction -- $265 more, for reasons that are not entirely clear.

Well, as of January 1, 2008 there is no more sliding scale for living expenses. It has been replaced by a single, uniform living expense deduction that applies to all across all income levels. Low income debtors will benefit from the changes, as the new uniform deduction is higher than what they get now, but most of these debtors are below the state median income, and therefore qualify for bankruptcy anyway. Higher income debtors lose out, and those in the middle aren't affected as much.

For those on the upper end, a reduction of several hundred dollars per month may mean they'll have to learn to live on less per month if they're filing a Chapter 13 and, unless they were on the borderline of qualifying for Chapter 7, they may not qualify next year, if they can't prove there is a good reason their expenses are higher than the allowances.

Filers with two or more people in their household will not see as great a reduction under the new uniform standard; the most severe reduction is for higher income individual filers living alone. Low income debtors will see larger expense deductions.

Some lower-middle income debtors, who are on the edge of passing or failing the means test under the current standards, may find it worthwhile to wait for the new forms, which have expense deductions that are slightly more generous than the ones currently in use.

Health Care Expense Deduction(s) Changed

A new line in the means test forms now lets you deduct a "health care expense allowance" for each person in your household for whom you pay out-of-pocket health care expenses.

Current forms only have a place for "actual" health care expenses and do not offer an "allowance," as there are for other types of expenses, such as food and clothing.

The revised means test form splits line 19 of the form (line 24 for the Chapter 13 version of the form) into parts A and B. 19A (24A) is the original line 19 (24); 19B (24B) is the new Medical Allowance.

The new line 19B includes a mini-worksheet to determine how much of an allowance you get, depending on the number and age of the people living with and dependent on you. Each person under 65 is worth a $54/month deduction, and those over 65 are worth a $144 deduction per person. Note: this allowance is a uniform national standard that does not vary from county to county.

Meanwhile, Line 31 (36), -- where you used to list your "actual" out-of-pocket medical expenses -- now is only for those expenses that are "in excess of the allowance" you took on Line 19B (24B). (So, if you're converting from the old form, simply subtract the new amount on line 19B from whatever you had on line 31 of the old form, or put zero if the allowance is larger than your actual expense.)

Note that health insurance costs are still deducted separately on Line 34 (39). That has not changed.

Although the new allowance may make the data entry for health care expenses more challenging, the allowance seems to be a win-win for consumers. You are still entitled to deduct the full amount of your actual, documented out-of-pocket medical costs, assuming they appear reasonably necessary. But under the new medical allowance, you get a monthly medical expense deduction even if you don't have documented costs; the new form grants you a standard monthly allowance for that expense.

But, you may be wondering, is this really a new allowance? Or did they just lower some other living allowance and split health care out of a larger "lump" of expenses? Although the living expense allowance has switched from a sliding scale, to a fixed allowance, comparing the two is difficult and will vary from debtor to debtor. However, it appears that the new allowances with the health care allowance added will result in a higher overall deduction for most debtors.

Larger Ownership Expense Deduction for Two-Car Families

In the latest standards, both the "ownership allowance" and the "operation allowance" have increased markedly for your "second" car. This is welcome news. With the growing income gap in America, most families today need two or more jobs just to meet monthly expenses. And so most families need two cars. Under the old standard, the ownership allowance for the second car was substantially less than the allowance for car number one.

Under the new transportation standards, each car gets the full allowance. That is, the allowance for two cars is simply double the allowance for one. This is a welcome change and should help those above-median income debtors who are within a few hundred dollars a month of passing or failing the means test.

Localized Transportation Costs Changed

The transportation operation expense standards have two major changes.

First, they've eliminated some regions that used to get special treatment. People living in metro areas of Cincinnati, Kansas City, Milwaukee, & Tampa now must use the generic regional standards, which are sometimes lower, but not always.

The second change is that the so-called "mass transit" allowance (the expense allowance for people with no autos) has been changed to a uniform national standard of $193, rather than being separately computed for each metro region. For most people, this will be a significant reduction. For example, for car-less residents of New York City, the allowance, as of the first of the year, has been slashed in half from $313 per month to $163 -- about half of what it was.

Should You Wait for the New Form?

With the wide range of the changes coming January 1, it's difficult to make generalizations of how people will be affected. Some will fare better, some worse. One thing is clear: people filing as an individual living alone are in for significantly reduced expense allowances.

The new standards appear to be aimed at reducing the difference between two people filing separately, versus two people filing jointly. Under the old standard, you got significantly better treatment as an individual than as a couple. Now that disparity has been eliminated, for the most part, by lowering expense allowances for individuals, and, in some cases, raising them for two people. The new standards seem to eliminate a "penalty" for joint filers (or a benefit for filing separately, depending how you look at it.)

Across the board, under the new standards, expense deductions for two people are simply 100% more than expense deductions for one, whereas current deduction amounts for two people run only about 70% more.

Can You Start Using the New Forms and Standards Now?

One could make, and some have made, a solid argument that the new forms must be treated as valid now, because the law states that "current" IRS standards are to be used, and these are the only forms that allow for proper application of the new IRS standards, which were updated in October of 2007.

How Can I Compare the Old and New Numbers? (the site I operate) is offering a free beta preview of the 2008 Means Test Calculator that can be used to get a good idea of what your results would be under the new standards. Just enter your zip code and click "Go". When you get to the calculator, click on the link near the top of the page that takes you to the beta preview of the 2008 version.

December 11, 2007

Using Non-Lawyers to Help You With Your Bankruptcy

If you want help in filing your bankruptcy, you can use a lawyer or a non-lawyer. The lawyer will charge you about $1200-$2000, depending on the location. The non-lawyer will charge you about 10% of the lawyer's fees -- between $125 and $200. So why would you use a lawyer instead of a non-lawyer? To begin, the non-lawyer can prepare your formal paperwork as well as a lawyer could -- in fact, most lawyers rely on non-lawyers to do all the paperwork.

The lawyer can counsel you about your various options, whereas the non-lawyer is prohibited from giving you any information about bankruptcy. That alone is a big reason to hire a lawyer, especially since bankruptcy laws prohibit non-lawyers from advising you about:

  • whether to file bankruptcy

  • which type of bankruptcy to file

  • which types of debts bankruptcy will get rid of

  • which types of property you can hold on to

  • the tax consequences of a bankruptcy discharge

  • what you should do about collateral for secured debts

  • how to characterize the nature of your interests in property, or

  • bankruptcy procedures or rights.

How to get bankruptcy information. So where would you get this information if the non-lawyer can't give it to you? Nolo's bankruptcy books are a good start, as is your favorite search engine. The federal court website has a publication -- Bankruptcy Basics -- that may answer some of your questions. Nolo's online Bankruptcy Resource Center has articles and FAQs about both Chapter 7 and Chapter 13 bankruptcy. The Legal Consumer website will help you with the means test (if you need it), as well as other useful information

Free legal consultations and flat-rate services. Many bankruptcy lawyers will give you a free consultation, which can be helpful if you have specific questions (for example, what will happen to your boat if you decide to file). Also, Affordable Attorney Advice offers a flat rate service of $100 for anyone using Nolo's book How to File for Chapter 7 Bankruptcy, or a California non-lawyer to do their bankruptcy paperwork.

The creditors' meeting -- do you need a lawyer? If you spring for the $1500 (average) for a lawyer, he or she can accompany you at the one personal appearance you are likely to make -- the creditors meeting. You must represent yourself at that appearance if you use the non-lawyer for your paperwork. Self-representation at the creditors' meeting is unlikely to have much of an adverse effect; however, it is you who must answer any questions directed your way in the creditors' meeting, and not the attorney who is representing you. Many believe that the fees charged by an attorney for an appearance at the creditors' meeting are a waste of money. You shouldn't really blame it on the attorney, however, since most bankruptcy judges require the appearance as an ethical responsibility

After the creditors' meeting. In most bankruptcy cases, nothing of consequence happens after the creditors' meeting. You have to file a single page (form 23) that tells the court you've completed budget counseling, and that's about it. Sixty days after the creditors' meeting, you should receive a notice of discharge in the mail. You may be curious about what this notice means and can ask your attorney -- if you have one -- or consult the resources mentioned earlier.

So why pay an attorney $1200--$2000 instead of a non-lawyer $125-$200? Beats me. If something weird happens in the case, you'll probably need a lawyer, but you can pick one up at that time. There's no point in worrying about the unexpected in advance.

Legal restrictions on non-lawyers. You may be curious about why non-lawyers are so restricted in what they can tell their customers if the type of advice people are seeking is so easy to find on the Internet. About twenty years ago, the attorneys who competed (and still compete) with non-lawyers lobbied Congress to pass the Bankruptcy Petition Preparer statute, which forbade the "practice of law" by these non-lawyers, as well as capping their fees at an impossibly low level. The intent of the statute was to drive the non-lawyers out of business -- and many turned their lights off.

For further help understanding bankruptcy, see Nolo's The New Bankruptcy: Will It Work for You?, by Attorney Stephen R. Elias.