Chapter 7 - Strategy Question - How to MAXIMIZE Expenses

[gman]

As a high income person, I may or may not qualify for Chapter 7.

I am in the pre-planning stages, where some of my strategy relates to maximizing ongoing expenses.

I am interested in any and all expenses that you all have seen be approved by Trustees that are beyond the regular ones like rent, food, etc.

Any and all ideas are appreciated - plus any commentary on how these were justified to the Trustee....

Thanks!

[justbroke]

If you don't have a huge housing expense (mortgage, taxes, insurance, maintenance, HOA dues/fees), then there is no way you're going to qualify for a Chapter 7. It's as simple as that. So, the first thing would be so see how much your housing is taking up of your budget. The more over the median that you are, the harder it is to qualify. Little $40 and $50 items here and there are not going to help.

When you're over the median, and moreso if you're significantly over the median, the United States Trustee (UST) is going to pull each and every expense apart. Without a solid base of expenses from housing costs, you don't stand a chance. If you are surrendering any property, this will also work unfavorably for you.

The only really unquestionable expenses are charitable contributions if they have been made consistently in the past (and documented via tax return or receipts) and are "continuing". Otherwise, everything else is at the whim of the Trustee and "nickel and diming" expenses is not going to work for a significantly over the median income debtor.

[HHM]

JB is right, you are not going to eat into an over median chapter 7 with misc expenses.

There is only 3 ways an over median person gets chapter 7
1. Non-consumer debt chap 7 (debt is mostly business debt)
2. Debt was incurred while participating in national security activity (i.e. soldiers in iraq)
3. Very high "secured" debt payment or some other out of the ordinary expense, i.e. medical.
The reason some over median filers can do chapter 7 is because they have ridiculous mortgage payment; the means test expressly allows you to take "secured debt" payment in Part II. (the credit card attorneys didn't really think this part of the means test through). Note, I call it part II because I think of the means test in 3 parts (1) over/under median, (2) income vs. expenses, (3) 2ndary presumption.
Other than that, trying to create misc expenses here and there are not going help. Part II means does limit you to IRS standards for certain categories, so you must have either high secured debt or provable, very high, out of the ordinary "necessary" expenses.

[gman]

If you don't have a huge housing expense (mortgage, taxes, insurance, maintenance, HOA dues/fees), then there is no way you're going to qualify for a Chapter 7. It's as simple as that. So, the first thing would be so see how much your housing is taking up of your budget. The more over the median that you are, the harder it is to qualify. Little $40 and $50 items here and there are not going to help.

When you're over the median, and moreso if you're significantly over the median, the United States Trustee (UST) is going to pull each and every expense apart. Without a solid base of expenses from housing costs, you don't stand a chance. If you are surrendering any property, this will also work unfavorably for you.

The only really unquestionable expenses are charitable contributions if they have been made consistently in the past (and documented via tax return or receipts) and are "continuing". Otherwise, everything else is at the whim of the Trustee and "nickel and diming" expenses is not going to work for a significantly over the median income debtor.

There is no property to surrender.

What might permit me to file Chapter 7 is a very large amount of unsecured debt - well into the 6 figures - which would make me eligible via the means test using the SECONDARY PRESUMPTION formula (lines 53-55 of the means test.)

With this being said - what ideas does the crowd have to maximize expenses.

[justbroke]

With this being said - what ideas does the crowd have to maximize expenses.

None. If you're over the median, "little" expenses are not going to cut it. See HHM's response above which is much more explicit.

[gman]

HMM & justbroke

First, thanks for the responses. Your insights will help me a lot when I approach lawyers to take on my case.

From what I see of the means test, even using the "regular" IRS allowable expenses I might have much less than 25 cents (maybe around 8-10 cents on the dollar) remaining of monthly disposable income to pay back ALL of my unsecured debt over the allowable 60 month period. (Yes, it is a HUGE amount of unsecured debt...but it is what it is....)

I was under the impression that the means test had this "secondary presumption" test for those who failed the initial presumption (like me.)

I will be "cutting it close" on expenses - hence my thread topic.

My income is variable (which can be a blessing or a curse given the means test) and short of quitting my current job I am unsure how I control that side of the means test. I can control the expense side - and it just appears that every nickel of allowable expenses is in my favor.

Ideas???

[HHM]

Generally, you will want to review your various insurance coverages. Do you have enough auto, health, term life etc. Those are some expenses you can play with.
You are right about the 2ndary presumption, if you fail all other provision of the means test, but you cannot payback 25% of your unsecured debt and that amount is NOT MORE THAN $10,950, you can state the presumption does not arise. However, this 2ndary presumption is the least tested area of the means test, it simply does not come up that much, you will still get a UST objection. You only go on to line 53-55 if the amount on line 51 is BETWEEN $6,575 and $10,950 and the amount on line 54 cannot be more than the amount on line 51.

You might be approaching this from the wrong angle, i.e. expenses. Maybe you should approach this from the income side, you mentioned here (and in another thread) that your income is quite variably...well...the means test is locked into the prior 6 months, throw together some low months before you file to decrease your declarable income.

I think you might need to reorient your expectations, not everyone can do a chapter 7 no matter how good or creative the attorney.

[justbroke]

From what I see of the means test, even using the "regular" IRS allowable expenses I might have much less than 25 cents (maybe around 8-10 cents on the dollar) remaining of monthly disposable income to pay back ALL of my unsecured debt over the allowable 60 month period. (Yes, it is a HUGE amount of unsecured debt...but it is what it is....)

You are misunderstanding the Means Test when it comes to a Chapter 7. Even if you're capable of paying $0.25 on the dollar, that amount, over 60months, can't be more than $10,950! So it's not that simple.

So, say that your total unsecured debt is $320K, and $0.25 on the dollar is $80K, that's 8 times too much!

This is why HHM and I are pretty firm that if you're a high income earner (like myself) and don't have high secured debts or your debts are primarily non-consumer debt, then no nickel and dime expenses are ever going to help. Actually, they'll hurt because the UST is going to go after them.

Tell us about your secured debt and whether this is mostly business debt? Having a lot of unsecured debt hurts you if it's primarily consumer debt!

[justbroke]

I like HHM's strategy to approach it from the income side. If you're earning all this commission related income, why isn't your unsecured debt more business related?

[gman]

Most of these debts are from (1) second mortgages - multiple and (2) unsecured credit cards. Divorce, disability, high medical bills, etc. came into play - but it is what it is.

I was using an online means test calculator at: http://www.legalconsumer.com/bankrup...0&sponsor=nolo

Anyway - I guess I have been misreading the DIFFERENCE between the INITIAL PRESUMTION determination (lines 48-52 of the form) and the SECONDARY PRESUMPTION determination (lines 53-55).

This website link/form made it appear like one could FAIL the INITIAL and still be able to qualify on the SECONDARY PRESUMPTION.

From what you stated - if you fail the INITIAL - you have NO CASE - regardless of the SECONDARY PRESUMPTION.

Am I getting it now???

[gman]

I like HHM's strategy to approach it from the income side. If you're earning all this commission related income, why isn't your unsecured debt more business related?

Reason - I work in sales - receive a salary PLUS commissions that can be ZERO for months at a time - and then a BIG commission when a sale occurs.

I am not in my own business.

[gman]

Generally, you will want to review your various insurance coverages. Do you have enough auto, health, term life etc. Those are some expenses you can play with.
You are right about the 2ndary presumption, if you fail all other provision of the means test, but you cannot payback 25% of your unsecured debt and that amount is NOT MORE THAN $10,950, you can state the presumption does not arise. However, this 2ndary presumption is the least tested area of the means test, it simply does not come up that much, you will still get a UST objection. You only go on to line 53-55 if the amount on line 51 is BETWEEN $6,575 and $10,950 .

You might be approaching this from the wrong angle, i.e. expenses. Maybe you should approach this from the income side, you mentioned here (and in another thread) that your income is quite variably...well...the means test is locked into the prior 6 months, throw together some low months before you file to decrease your declarable income.

I think you might need to reorient your expectations, not everyone can do a chapter 7 no matter how good or creative the attorney.

Thanks for the advice...maybe the income side strategy would work better.

What really concerns me is I cannot control commissions....as seen above - they can be nothing for months and then a big one due to a big sale.

I have no desire for Chapter 13. From what I have read - it seems like a no-win situation for 60 months given the variable income nature of my world. If I enter Chapter 13 - I end up forfeiting 100% of any commissions to creditors for the next 5 years - and if I end up with higher expenses and/or lower income in the future - I have no easy means of getting a downward adjustment in my monthly Trustee payments.

Seems like no man's land to me....I'd rather save money and negotiate with these creditors over the next 5 years until the SOLs run out if Chap 7 is not an option.

Could I be missing something?!?!?!

[HHM]

How much is your unsecured debt. If it is more than $336,000 combined, you cannot do chapter 13 anyway. You might be a chapter 11.

Variable income, by itself, does not mean you shouldn't do a chapter 13, it simply means it is more challenging. However, I think you might be overestimating your ability to save and settle without anything negative happening, i.e. lawsuits, garnishments etc. Many banks are moving pretty quick to sue, usually around 8-12 months after the first missed payment.

As for the "3rd means test" (the 2ndary presumption), an example may help

If line 51 is $10,000, you move to the 2ndary presumption.
If the debtors non-priority unsecured debt was $45,000
Then, 25% of that debt is $11,250
That debtor passes means because the DMI would pay back less than 25% of the debt.

If line 51 is more than $10,950, you NEVER get to the 2ndary presumption. Think about what that number is on a monthly basis, if you have more than $182.50 in disposable income, you NEVER move to 2ndary presumption. It would be very very difficult for an above median filer to have $182.50 or less in DMI. And it wouldn't take much for the UST to object to a few expenses to get there.

if line 51 is $9,000, you move to 2ndary presumption.
If the debtors non-priority unsecured debt is $35,000
Then, 25% of that debt is $8,750
Since $9,000 is more than $8.750, this person fails means test because they can payback at least 25%.

[gman]

How much is your unsecured debt. If it is more than $336,000 combined, you cannot do chapter 13 anyway. You might be a chapter 11.

Variable income, by itself, does not mean you shouldn't do a chapter 13, it simply means it is more challenging. However, I think you might be overestimating your ability to save and settle without anything negative happening, i.e. lawsuits, garnishments etc. Many banks are moving pretty quick to sue, usually around 8-12 months after the first missed payment.

As for the "3rd means test" (the 2ndary presumption), an example may help

If line 51 is $10,000, you move to the 2ndary presumption.
If the debtors non-priority unsecured debt was $45,000
Then, 25% of that debt is $11,250
That debtor passes means because the DMI would pay back less than 25% of the debt.

If line 51 is more than $10,950, you NEVER get to the 2ndary presumption. Think about what that number is on a monthly basis, if you have more than $182.50 in disposable income, you NEVER move to 2ndary presumption. It would be very very difficult for an above median filer to have $182.50 or less in DMI. And it wouldn't take much for the UST to object to a few expenses to get there.

if line 51 is $9,000, you move to 2ndary presumption.
If the debtors non-priority unsecured debt is $35,000
Then, 25% of that debt is $8,750
Since $9,000 is more than $8.750, this person fails means test because they can payback at least 25%.

Debt total is around 240k.

So in a crazy way I am boiled down to 2 options:

1. Continue as is. Salt away as much cash as possible. Negotiate with creditors one by one over time. Fight lawsuits as they come in, etc.

2. Take a new job with lower (salary) income. Defer commissions for 6+ months. (Eat beans and rice in the interim.) File for Chapter 7 after 6 months expire.

The SECONDARY means test for me is almost a slam dunk given how much debt I have.

If I go for a Chap 7, I need to focus on the INCOME and bite the bullet for 6+ months. In this way I can qualify for the INITIAL PRESUMPTION as well.

AM I FINALLY GETTING IT?

[catleg]

I think you're getting it. I'm in a similar position. Currently working a ch13 trying to confirm a plan with the least dividend to unsecured creditors.

If you can borrow from 401k and spend the money on some exempt purpose you then have the loan repayment as an expense (to payback yourself).

Likewise switching to a Roth 401k / Roth IRA generates higher tax expense.

I am putting every possible dollar into 401k (after tax contribs, etc). So far trustee has not made it an issue.

Term life insurance, "cadillac-plan" auto, health, disability insurance is another idea.

Best idea would be to reduce earnings for a few months. Not sure if that causes the "totality of circumstances" objection.