Means Test questions

[mitchell]

A few questions about the Means Test (for the sake of argument, all debts are unsecured and very few assets except for two old paid off cars and a home on which the mortgage will continued to be paid with little equity):

1. In step one, if you are above the median income by only $300 for the year, is there any wiggle room to still qualify for Chapter 7?

2. If failing step one and moving to step two, are the income and expenses calculated in step two still based on the previous six months?

3. When figuring income and expenses in step two, are 401k loan repayments allowable expenses? How about 401k contributions? How about expenses for college courses?

4. If disposable income shows zero or negative in step two, do you qualify for Chapter 7 or are there other criteria to be met?

Sorry if these are stupid questions.

[SMinGA]

Being above median income does not automatically mean ch. 13. There is still the question of your DMI and expenses.

Means test uses standard figures, not actual expenses. Exception would be things like if your mortgage is higher than the standard. Its not a final answer on what chapter you may or may not file - but attempts to answer the question: is there a presumption of abuse? If the answer is yes, then filing ch. 7 will be harder potentially. Even then its not out of the question. In other words, were you living beyond your means and spending on credit when you should have known you could not afford to pay it back?

Schedule J in the bankruptcy petition uses your actual expenses, to determine your actual DMI.

401k loans are not treated as an expense in a ch. 7, but will be treated as an expense in a ch. 13. Which means if your 401k loan is the only reason you are at a negative DMI (without the loan you'd have money to spare) then you may have trouble filing ch. 7. Some steps to take? Evaluate your actual expenses. Are there things you have been neglecting that you should take care of? Reasonable deductibles on your auto insurance? Have life insurance? Attending to medical/dental/vehicle maintenance/etc. in your list of expenses?

[HHM]

1. No

2. yes and no. The expenses in some categories are IRS allowed only. In other categories, you use the last 6 months.

3. None of those expenses are allowable. HOWEVER, if the ONLY reason you show DMI on step II is because you are not counting the 401K loan repayment or contributions, then you still qualify for chapter 7, because in a chapter 13, those expenses are allowed.

4. Generally yes, assuming your expenses are all allowed, if you have no DMI, you get chapter 7.

[jennilynn]

Means Test

1. No

2. yes and no. The expenses in some categories are IRS allowed only. In other categories, you use the last 6 months.

3. None of those expenses are allowable. HOWEVER, if the ONLY reason you show DMI on step II is because you are not counting the 401K loan repayment or contributions, then you still qualify for chapter 7, because in a chapter 13, those expenses are allowed.

4. Generally yes, assuming your expenses are all allowed, if you have no DMI, you get chapter 7.

If you THINK you are above median, aren't sure on the expenses to deduct, I would highly suggest seeing an attorney about it. Only time 401k is deductible in a Chapter 7 means test is if its MANDATORY. Our state's retirement is mandatory, most government workers are mandatory contributions, so they can deduct them. Mine - nope. Not mandatory. When you fill out the means test, if you have DMI after deducting the allowed deductions, you technically don't qualify for a 7 - regardless of any other monies that you really do spend (like the 401k, 401k loans, college tuition)... when you fill out the means test, dont' qualify for a 7, then you can go into the means test and fill in the 401k/401k loan repayments in block nunber 55 - to reduce you DMI (which in alot of districts is essentially your payment to unsecured creditors).

An experienced attorney can run a mock-up and determine your situation fairly quickly. The office I work for does it for a nominal charge after a consult to see where someone sits if it's questionable so we can adequately advise them and quote a fee.

Good luck.

[mitchell]

Thank you for all of the responses. They have been extremely helpful.

Needless to say I am in a bit of a tight situation. All of the debts belonging to my wife and I are unsecured, with one exception. I have a home equity loan that is waaaaaay behind.

As luck would have it, I received a small raise at work earlier this year that nudged us over the Median. Of course, as I understand it, even without the raise, the default equity loan would prevent me from filing Chapter 7.

However, with or without the equity loan (whether it was current or better yet didn't exist), My DMI is negative by several hundred dollars, which makes a Chapter 13 problematic. So, it appears if I can do something about the equity loan, I can qualify for a chapter 7.

That's were my question about the 401k loan comes in. I can catch up the equity loan, and maybe even eliminate it all together by borrowing against my 401k. The downside is that the subsequent drop in my paycheck for the automatic 401k loan repayment makes paying the real life bills (utilities, son's school, first mortgage, etc.) precariously difficult.

Feeling like a rock and a hard place. No Chapter 7 because of the equity loan, and no Chapter 13 because of a waaay negative DMI. I don't know what to do. Its seems that I can neither pay my debts or file bankruptcy.

[keepinitreal]

We took a hardship withdrawal from our 401k. First they made us borrow $1000, then the next day they gave us the hardship withdrawal. If you've run out of other options, maybe you could consider this strategy. Your loan payments would be minimal, while you would have the money you're searching for.

The conditions of our hardship withdrawal were:

The withdrawal is necessary due to an immediate and severe financial need
The withdrawal is necessary to satisfy that need (i.e., you can’t get the money elsewhere)
The amount of the loan does not exceed the amount of the need
You have already obtained all distributable or non-taxable loans available under your 401k plan

It had to be used for one of these purposes:
A primary home purchase
Higher education tuition, room and board and fees for the next twelve months for you, your spouse, your dependents or children (even if they are no longer dependent upon you)
To prevent eviction from your home or foreclosure on your primary residence
Severe financial hardship
Tax-deductible medical expenses that are not reimbursed for you, your spouse or your dependents

[momofthree]

Is your HELOC unsecured at this point? Meaning your home is worth less than you owe on your 1st mortgage?

[mitchell]

Is your HELOC unsecured at this point? Meaning your home is worth less than you owe on your 1st mortgage?

My home is worth more than my 1st mortgage.

[mitchell]

To prevent eviction from your home or foreclosure on your primary residence
Severe financial hardship
Tax-deductible medical expenses that are not reimbursed for you, your spouse or your dependents

I'm looking into my withdrawal options.

Something else has occurred to me though. Wouldn't a withdrawal count as income? If so, its seems that the timing of such a withdrawal to payoff that debt would be important toward qualifying for Ch. 7.