High Income Salary $170K - Passed the means test

[BenzUp]

Hi all,

A bit of background info first - I have a failed business that I attempted to fund with personal resources, namely credit cards and a 401K loan. I also have a home that has $100K negative equity and a couple of expensive car loans (also with substantial negative equity). The cars and home pmts combined were more that half my take home pay and another couple grand/mo. in credit card payments. For the past year, I have been running a deepening negative cash flow. I figured it was time to seek Ch. 13.

I saw the lawyer and within 15 minutes of running numbers, he stated that I met the means test for Ch. 7 - even with an income of $170K/year. This was due to the large payments I had on my secured debts (not the credit cards).

Anyone in a similar predicament (unusually large payments for secured debts) should not assume Ch.13 is your only answer. Once you pass your means test, you still have another hurdle to overcome - your Schedule J. I passed this as well. It is intended to ensure that you don't simply walk away from all your secured debt. In my case, I surrendered one vehicle (maybe two - still waiting that determination) but am keeping everything else.

One Warning - Ensure your petition and $numbers are PERFECT as you will very likely be AUDITED by the trustee. I posted a separate thread on this experience. I have passed the creditors' meeting and am now in that very stressful 60 day waiting period. I am hopeful that light will soon appear in this tunnel.

[123boxie]

The means test must be different for every state. Our means test for Indiana is based upon number of dependents and has nothing to do with obligations for secured debt. Maybe the other schedules I will fill out do, but not the initial.

I'm curious though if your house is so underwater (100k) why would you want to stay in it? I know we all love our homes and it kills to give them up and believe me I have labored long and hard on my decision, but realized it might not make sense to keep it. I have had several long discussions with everyone on this board and the home thing has gotten several comments.

Also because I too had a struggling business it was easy to say it was the business, but in reality it was a culmination of several things that got us in trouble. Ok, to be harsh maybe you might be doing the same to yourself. If we had filed bankruptcy the first few weeks that we thought about it we wouldn't have turned anything in, but the more you think on it the more you realize what got you where you are might sink you again. You don't want to go right back into bankruptcy.

Although with that kind of income you have I'm certainly jealous and wish our scene was quite so good. Well I hope you don't take this as slander but more I hope you are looking at your future as well.

Jen

[BenzUp]

Thank you Jen. You are correct on the business. It was the straw that broke the camel's back. The hole was dug and the business simply bottomed me out. As for the house, I am in it for the long haul and I have seen prices recovering in my area. More importantly, in my case, it wasn't really an option. Taking in all my secured debts, I am only able to surrender that which would keep my Schedule J in a negative balance. As I interpret it, this schedule is designed to prevent people from walking away from debts that they CAN afford to pay. Hope that makes sense.

[123boxie]

Yes, I think I need to look a little closer at the schedule myself. Make sure I'm not going to screw anything up on my end. I'm glad to see that you are going to recover. I honestly think, after going through this, that more people would be filing if there wasn't so much stigma associated with bankruptcy and really it is just a credit score. Paper!

[me90210]

From my understanding, the means test is just a test to see if you can even file. After that it's up to the Trustee to guide the case.

You list your secured debt to pad the payments, add in IRS allowed expenses and if you're still in the negative income range, then you're good to go. File Chpt 7, throw away all of the reaffirmation agreements then start fresh with 0 debt and $170k salary.

[MarieT]

Hmmm...I think I met with the wrong attorney! I ran the means test online and we qualified for Ch7 after putting everything in. I met with an attorney and he said highly unlikely that we can go Ch7, probably Ch13. I was a dope and just went along ...partly because we have been getting some ugly calls from collectors and I figured he knew what he was talking about.

So now I have given him $400 down but since I have been trying to educate myself through everything on this site, I am actually thinking it might make more sense to try to settle even if we have to pay income tax on the forgiven debt on the 1099c. I am meeting with another attorney next week (soonest I could get in) that someone on here was kind enough to recommend. I figure if I have to lose the $400 that is small enough price to pay if I end up with a better solution.

BenzUp....did you do the schedule J yourself? I am trying to figure out as much of this as I can to make the best informed decision possible.

[123boxie]

marieT,

I'm not sure how much you owe or what your circumstances are but the settling really caught my eye.

We had considered settling and really were dealing with credit cards often in this regard and then I realized I had too many creditors, 28 and that would take way more time and I wouldn't have the money to settle anyway.

However, if you have cash available I assure you, you can settle for around 30% if you default on everything they will be realistic settling with you. I caution though that some banks are way too difficult to ever try and deal with and you are looking at years to complete. I found talking to banks that they only care about what your credit score is like and bankruptcy while a hit isn't that big of a deal now. that is a personal decision, but settling takes a lot of intestinal fortitude and just treat it like a bank transaction. Never get emotional and just offer them the same information in numbers. do not give them any personal information they just use it to string you along. You can really call their bluff and get them to be quiet on the phone. Just repeat the mantra "I don't have the funds" no matter what, then offer the settled amount you want. I had a spreadsheet with my maximum amounts and a few were really close in their offers, but alas we just didn't have the money to cover it.

Bankruptcy is actually less painful.

Also I too saw an attorney who only wanted to go with 13. I think it is because then he gets more income over the course of the chapter 13. Here I am being charged 1850 for chapter 7, but if I filed chapter 13 I would pay 1350 and then the lawyer would submit a bill to be paid from the courts for 3800 during the course of the 13. I know that includes the pain they have to go through for the duration for all the collection calls, but still some may just want the extra money. Or he is just too new and doesn't want the risk.

who knows and I'm sure there are a lot of people on this board who know more.

By the way Benz sorry for hijacking. Won't happen again.

[BenzUp]

Marie - I had the lawyer use his computer system to enter everything. The forms are absolutely impossible to navigate beyond the basic stuff. And keep in mind that I am somewhat of an exception because my monthly payments for secured debt (house and cars) is high. It won't hurt you to seek a 2nd attorney's opinion before deciding whether to forfeit your $400.

[MarieT]

Boxie and Benz... Thanks for responding...I am so just trying to learn about this...all new territory for me. We owe about $60,000 cc debt, $27,000 IRS debt and $25,000 LOC debt. The cc debt is only on 3 cards. I have already negotiated the $20,000 one down to $4,000 but think they will go lower, so I'm thinking if it would be 28% income tax on the forgiven debt on the 1099 the cost of settling that one would be about $8,000 but they have already agreed to just take $1500 and spread the rest over 6 months. Of course I would have to come up with the other $4000 for the IRS in 2011.

Have another card that is $35,000 that the collector has just started calling...all three cards have been written off so are already with secondary collectors. Not late with payments on LOC and have been with that bank for 25 years so thinking if I could get everything reduced but LOC maybe I could just go talk to them, close accounts and pay off with no interest.

Of course I realize the difficult thing is getting all the cc's negotiated at once... I cannot finalize an agreement with one unless I have agreements with all and no way would I be able to do that if I had 28 to deal with!!

Part of the deal with all of this is seeing if the IRS debt can be written off...it is likely that it can be...fits all the criteria I have researched...and if it can only be written off through BK then all bets are off on everything else...we will go the BK route. If that big chunk can't be written off, it makes settlement maybe a better option. I am gaving a tough time with CH 13 as I just went through a year of getting my home loan modified - was successful finally but sick to death of being under the microscope and not sure I can handle that for the next five years!

Benz...did the attorney load everything up for the means test in your first meeting? Just wondering because I feel like I am operating at a loss here not knowing if I could qualify for Ch 7. I do have an appointment with another attorney next week who is a tax expert and also looks at whether it would make sense to do settlement before filing BK. I wish I had found him first. When I was making the appointment they asked me if I had more than $15K in debt...silly people!!

[BenzUp]

Marie - Yes, the lawyer and I determined during the first 15 minutes that I would qualify for Ch.7 versus Ch.13. He punched everything into his computer and that was it. If I understand it correctly, the first part of the 'means test' determines your income against your state's medium income... If less, you can do Ch.7 regardless. If not, you go the next stage of the 'means test' which looks at your income and all your *living* expenses (utilities, transportation, income tax, AND mo. pmts for SECURED debts (cars, home, boat, etc.)). There is no line item for credit cards so this part of the means test doesn't care about the unsecured debt. At this point, if your deductions are more that your income you qualify for Ch. 7. If not, continue to line 53 which is for NON-Secured debt... You can see where this becomes a task for a computer inside your lawyer's office!

[nerves]

There is also a provision with the means test if 50% or more of your debts is due to a business it can put you into a Chap 7 even if you are over the median for income. But, your expenses have to mesh with the second part to pass. I am sure on all the ins and outs of this but something to check into if you have a business and it appears a Chap 13 is what you are stuck with.

[onthebrink]

BenzUp,

Your situation sounds very similar to mine. I also had a failed business that I initially bootstrapped and then obtained outside funding. Similar situation in terms of home equity. I was afraid that we might be forced to file Ch 13 but BK attorney informed me today that we qualify for Ch 7 based on means test.

My chief concern is that my previous investors will find out about my filing. I have been told that since the company was dissolved and there are no assets this is not an issue. I am looking into restarting the business, still will have no assets except intellectual property.

Someone (me90210) on this thread mentioned that it's one thing to pass the means test but quite another to get the TT to approve the Ch 7. Did your attorney say your case might might bring any red flags if closely scrutinized? I believe that the TT has the right to investigate "totality of circumstances" to determine if you really do qualify for a Ch 7. My understanding is that you can get forced from a 7 to a 13 and that you cannot discharge a 13, so there is a risk that you could get bumped to a 13. That is my fear. I will file if we can get a 7 but if I think there is a possibility of getting moved to a 13, then I would just as soon not pay the CCs for six months and try to accumulate cash to TRY to do settlement with CCs.

Curious if you have discussed possible red flags with your attorney. I will, hopefully, speak with mine later this week.

Also, what paperwork/statements were/will you be required to submit?

[BenzUp]

In my case, the secured debt that i am keeping (two cars and home) all have negative equity and my Schedule J is a few hundred dollars under the threshold. In my case, the 'red flag' is my high income itself. He hasn't indicated any other reason for concern. Remember too that I am undergoing an audit by the US Trustee's office (see separate post by me on this). I had my 341 meeting recently and nothing (other than the audit) was brought up. I'll certainly post any updates as they occur.

[onthebrink]

Ok. Thanks. I have similar situation. House under water. $120K HELOC. $120K in CC debt. Currently on UE but family income last year was $160K and prior year over $200K. Currently on unemployment. I am assuming I will get audited. Also in CA.

Did you have to provide financial statements for business?

Thanks and best of luck!

[Depressed]

I wonder how many people that file an over the median CH.7 while passing the means test get forced into a CH13. I'm over only 5-600$ or so, but I'm afraid that will happen to me. As all of the attorneys around here get an extra $1750 for a Ch13, I don't know how hard they'll try to keep me in a 7.