Chapter 7 & Means Test

Chapter 7 Bankruptcy  is the most common form of bankruptcy.  Most Bankruptcy's that are filed are Chapter 7 Bankruptcy's.  A Chapter 7 Bankruptcy is most often filed by individuals and married couples.  This type of bankruptcy is also available to corporations, partnerships, and limited liability companies.  Most people that file a Chapter 7 Bankruptcy loose virtually nothing.  All they lose is the obligation to pay debt!

You are eligible to file a Chapter 7 Bankruptcy AND receive a Discharge of your debts:   if you have never before filed a bankruptcy or:
 

§ 727. Discharge

(a) The court shall grant the debtor a discharge, unless—

(8) the debtor has been granted a discharge under this section, under section 1141 of this title, or under section 14, 371, or 476 of the Bankruptcy Act, in a case commenced within 8 years before the date of the filing of the petition;  

         IE:  CAN FILE CHAPTER 7 IF PRIOR CHAPTER 7 BANKRUPTCY WAS FILED MORE THAN 8 YEARS AGO.

 (9) the debtor has been granted a discharge under section 1228 or 1328 of this title, or under section 660 or 661 of the Bankruptcy Act, in a case commenced within six years before the date of the filing of the petition, unless payments under the plan in such case totaled at least—

(A) 100 percent of the allowed unsecured claims in such case; or

(B) (i) 70 percent of such claims; and

(ii) the plan was proposed by the debtor in good faith, and was the debtor’s best effort;  

        IE:  CAN FILE CHAPTER 7 IF PRIOR CHAPTER 13 BANKRUPTCY WAS FILED MORE THAN 6 YEARS AGO

if eight years have passed from a previous Chapter 7 discharge or after six years have passed from a previous Chapter 13 discharge.   

  You cannot file for Chapter 7 bankruptcy if a previous Chapter 7 or Chapter 13 case was dismissed within the past 180 days because:

1.  You violated a court order

2.   the court ruled that your filing was fraudulent or constituted an abuse of the bankruptcy system, or

3.  you requested the dismissal after a creditor asked for relief from the automatic stay.

                                                                                     MEANS TEST

To be eligible to file for a Chapter 7 Bankruptcy, you must take and pass a test.  This test is called a "Means Test".   All individual bankruptcy petitioners must take a Means Test to determine whether or not they are eligible to file for Chapter 7 bankruptcy. The Means Test compares your personal income with the median Arizona income. If you are below the median Arizona income, you are eligible for Chapter 7; if you are above the median income, other factors such as expenses will be taken into consideration, and you MIGHT pass the Means Test.  A series of complex mathematical formulas have been put in place to evaluate the rest of people who don’t initially pass the Means Test. If, after the Means Test, you are determined to be not eligible for Chapter 7, you will have to file for Chapter 13 or Chapter 11 Bankruptcy or not file any Bankruptcy.  When we meet, we will discuss the Means Test and how it affects you. 

Below is a copy of the most current Means Test.  The figures in this Means Test are only applicable to persons who file a Bankruptcy in Yuma, Arizona.  Each County and each state has different figures based upon that states median income. These amounts reflect the average incomes in Yuma, Arizona.

                                                        Means Test - Yuma, Arizona

                                                                               Arizona Census Median Income Effective November 1, 2011 

        

 When you file a Bankruptcy, the Court appoints a person called a "Trustee".  This Trustee basically does two things:

1.  It is his job to check your paperwork and insure that everything that you state and list is true and correct and accurate and complete.
2.  In a Chapter 7 Bankruptcy a court-appointed trustee liquidates (sells) your non-exempt assets and divides the money between creditors.  Exempt assets are not subject to being taken and sold. To see what Arizona considers "EXEMPT" click on the button called "EXEMPTIONS". 
3.  At the present time there are two Trustees in Yuma; Trustee Jim Smith who is an attorney and who has his office in Yuma and Trustee: Lawrence J. Warfield.   Mr.Warfield is a CPA and his office is in Scottsdale, Arizona.  After you file your Bankruptcy, the Trustee will mail you a packet that will ask you to answer questions and require you to mail him documents.  You MUST cooperate with the Trustee.  You can obtain information about Trustee Warfield and his information at:  WWW.phxbankruptcycom. 
4.  The Trustee can take from you all property that is non-exempt.  Part of your attorney's job is Bankruptcy planning.  Your attorney will talk with you and then plan how you can best proceed and loose as little of your property as possible.  As you'll read, Bankruptcy planning can be a catch 22.  No matter what you do, the Trustee can fight and he will take the stance that you are wrong and comitted fraud.  Unfortunately, the rules and Court cases are not exact and no matter what you do, there are cases that state that you are correct and cases that state that you are wrong.  Your Attorney's job is to guide you and give you information, but your attorney cannot guarantee that the Trustee won't fight about anything and everything.
5.  The Trustee's job is to make sure that everything that you put on the Bankruptcy Petition and that you signed is true, correct, accurate and complete AND his job is to take all non-exempt assets, sell them and pay the proceeds to the Creditor's.
6.  The Trustee can require you to prove and document everything that you put into the Bankruptcy.  He can require you to prove each and every expense that you state and he can require receipts to document the expense. 
7.  Lately the Trustees have been making claims on vacation time and sick time and comp time.  Their position is that this is accumulated wages/pay or wates/pay due to you and only 75% of unpaid wages/pay is exempt, therefore the Trustee is entitled to 25% of all unpaid wages.
8.  You can't pick and/or choose what Trustee you get.  The Trustee is assigned by the Bankruptcy Court.  Each Trustee has a different personality and does his job slightly differently.  When your Trustee is assigned, after the Bankruptcy is filed, we can tell you more about the Trustee and explain what the Trustee will want from you and what he will do.  REMEMBER:  The Trustee is NOT on your side.  His job is to get everything from you that he is allowed.  The Trustee can file Adversary complaints, motions or Court actions against you for any reason.  His job is to try to get as much from you as he can!  Don't be surprised about anything that the Trustee does.  He will do anything to get money from you.  It's his job and he gets to keep a percentage of everything that he gets from you. 

Steps and Procedures in a Chapter 7 Bankruptcy

1.  You MUST pass the "means test".

2.  You MUST receive counseling from an approved credit counseling agency within six months prior to filing the bankruptcy petition. This certified counseling program will orient you of other options that are available to you. This counseling session will ensure that you don’t make an uninformed decision to file for bankruptcy.  You will be given a document verifying that you received the counseling and this document MUST be filed with the Court when your Bankruptcy is filed. 

3.  After you file the Bankruptcy, but before discharge you must take a Debtor Education Course.  You must complete this course normally within 45 days after the 341 hearing.

4.  The Court appoints a "Trustee".  The trustee is a federal employee appointed by the court to monitor your case and make sure you are eligible to file Chapter 7 bankruptcy. The trustee will review your petition, make sure that it is complete and schedule a Meeting of Creditors. The trustee will send you a letter requesting that you give him documents and information.  You MUST give the Trustee whatever he wants and cooperate with the Trustee.  If you do not cooperate with the Trustee, the Trustee can request that your Bankruptcy be dismissed.  The trustee has the responsibility of seeing that everything about the case is done according to the rules. The Trustee is the one who would object to exempt property that you may want to claim if the trustee feels that it is outside the scope of exemption. The trustee is also the person who could seek to have your bankruptcy petition dismissed if fraud or other wrongdoing is found.

 5.   When you file for Chapter 7, an automatic stay is immediately issued.  This stay is automatic and comes into effect on the day that the Bankruptcy is filed. It will stop the creditor harassment and contact.  This "automatic stay" also stops foreclosure and garnishment at the time the creditor is notified about the Bankruptcy filing.  The automatic stay will not stop a criminal action from proceeding or most divorce actions.  If you have an imminent foreclosure or garnishment, you can have your attorney send separate notification to the creditor immediately after the Bankruptcy is filed.

 6.  Notice is sent by the Court to all of your Creditors notifying them of the stay and the date of the 341 hearing.

 7.  There is a Court hearing (341 hearing) held approximately 40 days after you file your Bankruptcy where your creditors can appear and ask you questions (generally the hearing takes only 5 minutes and there are no creditors present). At this hearing the Trustee will want to see your driver's license and social security card.  The Trustee will also tell you that he has the right to receive any tax refund that you are entitled to receive and have not yet received.

The Trustee will ask the following questions:

a.  Are you represented by an attorney?

b.  Did anyone assist you in preparation of your petition and schedules?

c.  Did you review and sign the Petition and Schedules?

d.  Do your petition and schedules include ALL of your assets and everything you own of value and all of your debts?

e.  Have you ever filed for bankruptcy and if you did, did you receive a discharge more than 6 years prior to the date of filing this bankruptcy if you filed a Chapter 13 and more than 8 years if you filed a Chapter 7 Bankruptcy?

f.  Have you lived in Arizona the greater part of 180 days prior to your bankruptcy filing date?

g.  Did you transfer any property having a value of $250 or more to anyone in the 90 days before you filed the Bankruptcy and/or did you transfer any property having a value of $250 or more to any relative or close personal friend within the 12 months prior?

h.  Did you make any payments on any debts to any relatives or close personal friends during 12 months prior to the Bankruptcy being filed?

i.  Do you have any other assets, property or entitlements or anything whatsoever of value that you have not listed in the documents you filed with the Court?

j.  Have you ever had the right to receive an inheritance and turned it down?

k.  The Trustee will tell you:  You are here today because the bankruptcy code requires each of you to be examined under oath with regard to the petition and schedules you have filed.  You are reminded that in accordance with 18 USC 152 and 3571, the penalty for making a false statement or concealing property is punishable by a fine of up to $500,000., imprisonment for up to five years, or both!

 8.  Once the bankruptcy is complete all of your dischargeable debts will be discharged (eliminated).   You will receive your discharge approximately 3 months after the 341 hearing if everything is progressing smoothly and if you have fully cooperated with the Trustee.  Typically all you must do to see your bankruptcy petition through to discharge is play the waiting game.  If no creditor objects to any specific debt for statutory reasons, and the trustee does not find that your case is “abusive” and dismisses it, then you will likely receive your Chapter 7 bankruptcy discharge.  Even though you receive the Discharge, the Bankruptcy is not totally closed until the Trustee closes the case.  The Trustee can close the case at anytime after the Discharge is entered.  The Trustee will close the case when he determines that there is nothing more to take from you and when all assets in his control have been distributed.

 9.  You can now go on with your life!

BANKRUPTCY PLANNING

            The 2005 Bankruptcy Reform Act has added several very complicated hoops to planning for Bankruptcy.  Paying down mortgages within the last 10 years, buying or transferring assets in the last 2 years or more, paying friends or relatives money in the past 12 months may all be doorways for the Trustee and your creditors to attach your assets.

            There are Court cases that say that converting non-exempt assets into exempt assets are proper, there are also Court cases that say that it is not proper and can be undone.  Congress even has stated that conversion of “nonexempt property into exempt property before filing a bankruptcy petition…is not fraudulent as to creditors, and permits the debtor to make full use of the exemptions to which he is entitled under the law,”  There are many conflicting court cases.  There is no absolute.  BUT, the Trustee can still object to the transfers as fraud, it would then be up to the Court to make a determination and there is no guarantee what the Judge would do. 

            Bankruptcy planning is a "catch 22".  There is no absolute!  You can have cases that approve of what you're doing and the Trustee can still file a complaint and the Judge can determine that it is wrong.  The Judge can rule one way one day and another way the next day.

            If you transfer assets to a relative you are putting up a BIG red flag.  Understand that it is more likely that the Trustee will file an objection if the transfer is to a relative.  There is nothing that stops you from doing this and you might win, but you'll probably have to fight and you also might loose.  If you loose the Court can undo the transfer and you'll loose the property or the property's value.

            If you transfer non-exempt property to exempt property prior to filing the Bankruptcy, the Trustee may object or he may not object.  There is no way to know what the Trustee will do.  One case draws a rational distinction between transfers of assets that are truly fraudulent and those conversions of non-exempt assets to exempt assets that do not support a finding of fraudulent intent. The court held that unless the creditor that seeks to deny a debtor’s discharge based upon his pre-bankruptcy exemption planning shows some deception or concealment, an insider transaction, a fraudulent conveyance, a secretly retained possession or benefit, or debtor explanations that lack credibility, the presence of other badges of fraud that are not themselves intricately indicative of fraud (such as the timing of the transmutation or the amount at issue) are insufficient to shift to the debtor the burden of going forward, even if all of the debtor’s non-exempt assets are converted into exempt assets just after the debtor is sued and just before the debtor files for bankruptcy. MMurpheyv. Crater, 286 B.R. 756 (BBankr D. Ariz. 2002).

                To avoid triggering a fraudulent transfer, such sales must be for fair market value and sold to persons who are not insiders. In WWudrick the Ninth Circuit even permitted debtors who obtained loan funds by offering non-exempt vehicles as security to deposit such funds into an exempt account before declaring bankruptcy.

            BUT: After such a transfer, Trustee, would likely try to unravel these transfers. Successful unraveling of the transfer requires establishing actual or constructive fraud. A showing of "badges of fraud" in a particular fact pattern may be sufficient evidence of constructive fraud. However, in Wudrick the Ninth Circuit held that the sole act of converting nonexempt assets to exempt assets is not in itself a badge of fraud. There is nothing that stops the Trustee from bringing a fraudulent transfer or preference action, whether or not the Trustee is right or wrong.  The Trustee can file motions or objections.  Your attorney has no control over the Trustee.  The Trustee has the right and power to object to anything that he can think of a reason to object too.

                Generally, the Ninth Circuit has taken a very debtor-friendly position by allowing intelligent exemption planning, even on the eve of bankruptcy. For example in a recent case, bankruptcy Judge Randolf J. Haines sought to distinguish three different categories of "badges of fraud" based upon their degree of severity. He itemized first those badges of fraud that are "indicative of concealment, deception, or fraudulent intent" such as a debtor's retained possession or control of the property after transfer, a concealed transfer, the debtor absconding, or the concealment of assets. A second category consists of less severe "badges of fraud" that do not suggest outright fraud but rather imply a non-economic rationale, such as the transfer to an insider, less than full consideration received by the debtor for the value of the asset transferred, or the debtor transferred the essential assets of the business to a creditor who retransferred the assets to an insider. The third category consists of the least severe "badges of fraud," timing factors. Timing factors are innocent in themselves but only become suspicious when combined with other factors. Examples of such timing factors include the debtor was threatened with suit before the transfer was made; the transfer was of substantially all the debtor's assets before petition for bankruptcy; the debtor was insolvent or became insolvent shortly after the transfer; or the transfer occurred shortly before or shortly after a substantial debt was incurred.

            Judge Haines said that the "badges of fraud" in the second and third categories only showed intent to convert a nonexempt asset into an exempt asset. Accordingly, such intent was not sufficient to sustain a summary judgment or even to shift the burden to the debtor in a trial. Transfers with badges of fraud in the second and third categories only demonstrate that the debtor engaged in permissible exemption planning when it was intelligent to do so and that the debtor was willing to sacrifice some asset values to achieve the exemption.

Therefore, the first category of the "badges of fraud" is most relevant towards a finding of fraudulent intent. In order for a debtor action to qualify as a first-category action, the creditor must show a deception or concealment; a fraudulent conveyance with a secretly retained possession or benefit; or that the debtor's explanations lack credibility. Debtors who are candid at all times and who openly admit when questioned to exemption planning motives will likely avoid having their actions cast into the first category. On a similar note, debtors should avoid converting major nonexempt assets into cash on hand because such large sums imply concealment, another first-category offense. Rather, the debtor should immediately convert cash on hand into exempt assets.

Fraudulent Transfers

            The Trustee also has the ability to set aside any transactions that are deemed “fraudulent transfer” under Federal or State law (See Code § 548, A.R.S. § 44-1001, et seq.).  Under the bankruptcy code, a bankruptcy Trustee may void any transfer within the last two years preceding the date of the filing of the petition if 1) the debtor made the transfer with the actual intent to hinder, delay, or defraud any entity,  2) the debtor made the transfer and received less than a reasonably equivalent value in exchange for such transfer, or 3) the debtor was or became insolvent on the date the transfer incurred and as a result of the transfer  (See 11 U.S.C. § 548).

            Arizona law expands the “fraudulent transfer” doctrine to include badges of fraud principles that include general concepts such as was the transfer to an insider, did the debtor retain possession or control of the property after making the transfer, was the transfer or obligation disclosed or concealed, was the debtor threatened to be sued or sued just before the transfer was made, etc.  Basically, if the transfer looks suspicious and if there is a lack of fair market  value, there may be a fraudulent transfer issue.  An example is a gift or transfer of property to a family member just prior to filing bankruptcy.

Lien Avoidance

            Under the bankruptcy code, the Trustee has unique “strong arm” powers that include the ability to avoid certain liens and transfers.  Specifically, § 544 creates a Trustee lien against all property in the bankruptcy estate, which thereby elevates the Trustee to a “secured” lien creditor.  Thereafter, the Trustee can use the U.C.C. § 9-317’s “first-in-time” lien against any liens filed after the date of the filed bankruptcy petition or against any liens that were unperfected (meaning incorrectly filed).

Lien avoidance is not unusual with respect to unperfected liens against vehicles.   In Arizona, a motor vehicle lien is not perfected until the date the application for title reflecting the lien is endorsed with a stamped date of receipt by the Department of Motor Vehicles (North v. Desert Hills Creditor, 310 B.R.152, 160 (BBankr Ariz. 2004).  Arizona statutes further provide that for a lien to be valid it must comply with the requirements of the law, which are elaborated upon under Arizona Revised Statues.  A creditor should prefect their interest in a motor vehicle within 20 days of the date the debtor took possession of the vehicle.

            In the event the lien is not properly perfected, the Trustee can avoid the lien.  The debtor must then secure new financing, such as thru a redemption program, or must otherwise pay the Trustee for the value of the vehicle, minus any applicable exempt equity that existed above the voided lien amount. Otherwise, the vehicle will be taken by the Trustee and sold to pay unsecured creditors.

Preferential Payment

            Under §547(b), a Trustee may avoid any transfer of interest of the debtor’s property if 1) the transfer was for the benefit of a creditor for an antecedent debt, 2) the debtor was insolvent at the time of the transfer, 3) the transfer was made within 90 days before filing the petition (or one year if the transfer was to an “insider”, i.e. family member or business partner), and 4) it enables a creditor to receive more than they would have received through the Chapter 7 claims process.

Simplified, if a creditor gets “preferential” treatment and the transaction fits within the provision of § 547(b), the Trustee can seek to recover the money against the recipient thereof.  The Trustee has the burden of proving the ability of avoiding of a transfer.  In practice, a debtor’s attorney reviews these issues while preparing the petition and they should be revealed and discussed prior to filing the case.

Defenses

The general defense to a fraudulent transfer or preferential payment is that the transfer or transaction falls within the “contemporaneous exchange for value” exception (See §547(c)(1)), was made in the “ordinary course of business” (See §547(c)(2)),   or that the transaction is a “purchase-money security interest” (See §547(c)(3) & U.C.C. §§ 9-317(e), 9-324(a)).

Under Arizona law, there is a general defense that protects the recipient of an alleged fraudulent transfer if the person undertook the transaction in good faith and for a reasonable equivalent value (See A.R.S. § 44-1008(A)). 

                                 How does Divorce and Debt affect the Bankruptcy?

            What happens to those debts that were divided in a divorce proceeding?  The answer to that question depends on two things: what type of debt it is, and what chapter of bankruptcy you are filing. 

            First, you must determine if the debt that is owed is what the Bankruptcy Code terms a “Domestic Support Obligation”.  The Bankruptcy Code defines a Domestic Support Obligation as a debt owed to a former spouse or child of the person filing for bankruptcy in the nature of “alimony, maintenance, or support.”  See 11 U.S.C. § 110114AA.  If the debt owed is child support or spousal maintenance (alimony), then it will not be discharged in either a Chapter 7 bankruptcy or in a Chapter 13 bankruptcy. 

            The second type of debt one often seen in divorce decrees and property settlement agreements are those debts that are neither child support or spousal maintenance, but are debts that were incurred during the marriage and divided during the divorce.  An example is credit cards that were used during the marriage.  The divorce decree will include a “property settlement agreement” that will provide for how these debts are going to be divided between the husband and wife.  Debts owed based upon a property settlement agreement are normally non-dischargeable in a Chapter 7 bankruptcy, similar to child support and alimony.  However, property settlement debt can be dischargeable in a Chapter 13 case.

            Couples facing divorce should consult with a bankruptcy lawyer before filing for divorce. It may be advantageous for the couple to file a joint bankruptcy that will eliminate most of the debts which, in the divorce, would have to be assigned for payment by one spouse or the other. When the judge in the divorce case orders a certain debt to be paid by a certain spouse, the Court’s order is not enforceable against the creditors. If the spouse whom the divorce court judge ordered to pay a debt fails to pay, then the creditor can enforce the debt against the other spouse. The divorce court judge cannot change the rights of the creditor who has the right to collect the debt from either one of the divorcing spouses.
            A divorce decree may result in limiting the debts which can be discharged in bankruptcy. After the Court has ordered the division of the debts, which is enforceable between the spouses, a bankruptcy by one of the spouses cannot discharge those debts which are assigned to that debtor by the divorce court judge. 

                                                  MORE ABOUT CHAPTER 7 BANKRUPTCY               

                A Chapter 7 Bankruptcy can stay on your credit report for up to 10 years and you can't file for a Chapter 7 Bankruptcy for 8 years from the previous discharge.

            Most debts that an individual has and that are listed on the Bankruptcy Petition can be eliminated.  If a debt isn't listed, it isn't eliminated, but you are required to list all debts.  Whether a failure to list certain debts is an honest mistake or a deliberate action, trustees view bankruptcy fraud very seriously and you can be prosecuted even if it was a simple error that went uncorrected. You also need to list all debts that you co-signed.      

            There are basically two types of debt:  Secured and Non-Secured.  A secured debt is where you give the lender an interest in the property that you are buying if you default on the payment.  An example of a Secured debt is a mortgage on property or a lien on a vehicle.  In a Bankruptcy, you have the option to give back the security and be discharged from the secured debt or if you want to keep the security, you must either continue to pay consistent with your original contract, enter into a reaffirmation agreement or redeem the property.  If you want to keep an item that has a lien, mortgage or security interest against it, you must continue to make payments and be current with your obligation.  You cannot keep a secured item and not pay the debt.  In other words, you can't get something for nothing. 

            Most all other debts are non-secured/unsecured debts.      

            Non-Secured debts that may be eliminated – or discharged – by filing Chapter 7 bankruptcy include (These debts are considered unsecured/non-secured debt, and Chapter 7 bankruptcy is designed to address these with great power):

• Credit Card Bills
• Medical Bills
• Payday Loans
• Personal Loans
• Some Signature Loans
• Utility Bills
• Back Rent 

                                         Non-Dischargeable Debt: