Author Archives: Ryan C. Wood

About Ryan C. Wood

Ryan C. Wood is a California attorney practicing primarily in the areas of Bankruptcy Law, Business Law and generally seeking justice for under represented clients in the Bay Area.

Can I Exclude My Voluntary 401k Contributions When Calculating My Disposable Income on the Means Test?

By Ryan C. Wood

Section 541(b)(7) of the Bankruptcy Code provides that wages withheld from employee’s paycheck for contributions to Employee Retirement Income Security Act (“ERISA”) qualified employee benefit plans, deferred compensation plans or tax-deferred annuities are excluded from the bankruptcy estate. This means that any of the above contributions to your retirement account are not counted as assets in your bankruptcy estate no matter how much money you have contributed to these accounts. If you are filing for a Chapter 7 bankruptcy case that means your retirement account is protected from creditor’s claims and you do not have to liquidate your retirement account to pay your debts.

What happens when your bankruptcy lawyers file for a Chapter 13 bankruptcy case? When you file a Chapter 13 bankruptcy case, assets that are considered to be property of the estate, are essentially split between two time frames: on or before the date you file your Chapter 13 bankruptcy case and after the commencement of your Chapter 13 bankruptcy case but before your case is closed, dismissed, or converted. This means that before your Chapter 13 bankruptcy case is filed your retirement contributions are not considered to be property of the estate. After your Chapter 13 bankruptcy case is filed §1306(a) of the Bankruptcy Code states that all property acquired and earnings received after the case is filed but before the case is closed, dismissed or converted to a Chapter 7, 11, or 12 bankruptcy case, whichever occurs first, is part of the bankruptcy estate.

How can something be excluded from the bankruptcy estate before your case is filed but included in your bankruptcy estate after your case is filed? The court for In re Parks (9th Cir. BAP No. 11-60050, August 6, 2012) explained that you cannot deduct voluntary retirement contributions when calculating your disposable income on the means test. The means test calculates, at a minimum, how much your unsecured non-priority creditors should be paid in your Chapter 13 plan. The court indicated that Congress did not mention that 401k retirement plans were reasonable and necessary expenses under §707(b)(2) of the Bankruptcy Code and therefore cannot be deducted from the disposable income calculation on the means test. Repayment of your retirement plan loan, however, is excluded from the disposable income calculation under §1322(f) of the Bankruptcy Code.

But what about public employees who have their retirement deducted directly from their checks each month involuntarily. A public employee can continue to contribute to their retirement to the detriment of their creditors but a person with private employment cannot contribute to their 401k plan anymore? Something is very wrong with that picture.

To sum up the case for In re Parks: all the money you contributed towards your retirement plan prior to the filing of your bankruptcy case are excluded from the bankruptcy estate but you cannot continue to voluntarily contribute to your retirement plan when you are in a Chapter 13 bankruptcy case to the detriment of your unsecured creditors. You can only deduct repayment of the retirement loan as an expense from your disposable income calculation.

Bankruptcy laws may sometimes be confusing and it is advisable to seek the advice of an experienced bankruptcy lawyer in your jurisdiction to help you navigate your Chapter 13 bankruptcy case.

Should My Social Security Benefits be Included in My Chapter 13 Plan Payments?

By Ryan C. Wood

Social Security income is excluded from the means test calculation under the Social Security Act and 11 U.S.C. §101(10A)(B). This means your bankruptcy lawyer should not count your Social Security Act income as part of your gross income in determining what chapter of the bankruptcy code to file under. Generally there are two tests to determine whether a person living on Social Security income can qualify to file a Chapter 7 or will they have to file a Chapter 13 bankruptcy case instead. The two tests are 1) calculating your disposable income in the “means test” and 2) looking at your income and expenses to see if there is any disposable income to pay into a Chapter 13 bankruptcy plan. In Chapter 13 bankruptcy cases the means test is more formally called Form 22C (Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income). In the means test uses your six month average gross income and compares it to the median income for the number of people in your household living in your area. If your household income is above the median for the number of people in your household you will need to deduct the allowable expenses (mostly based on IRS standards) to see what your disposable income is. This disposable income is what you need to commit to your unsecured creditors in a Chapter 13 bankruptcy plan. The other test is looking at your income (Schedule I) and expenses (Schedule J). Normally your Social Security income is included in Schedule I because it is income you receive. If your income exceeds your expenses you may have to pay the disposable income into your Chapter 13 bankruptcy plan even if some of the income is from Social Security. There is now new case law that challenges this.

In Anderson, Trustee, v. Cranmer (In re Cranmer), 2012 WL 5235365 (10th Cir. 10/24/12), the court ruled that Social Security income did not need to be included in a Chapter 13 plan payment. In this case the debtor, Cranmer, received Social Security income. He included the income in his Schedule I but deducted a portion of the income on Schedule J as exempt Social Security funds. The trustee objected to this and also indicated that failure to include all of his projected disposable income means he did not propose his Chapter 13 plan in good faith. The court shot down the trustee’s objections. The court indicated that although “projected disposable income” was not defined in the Bankruptcy Code, “disposable income” was defined in 11 U.S.C. §1325(b)(2). Disposable income excludes Social Security income. The court reasoned that putting the word “projected” in front of “disposable income” did not change its meaning and that Cranmer was correct in excluding a portion of his income as exempt Social Security funds. The court also indicated that proposing a Chapter 13 plan payment that followed the Bankruptcy Code was not considered bad faith.

There are similar cases being appealed in the 4th and 5th Circuits currently. You should remember that the rules may be different depending on where you live, so if you have any questions you should consult an experienced bankruptcy attorney in your area.

What is Considered Separate Property and How Does it Affect My Bankruptcy Case?

By Ryan C. Wood

When you file for bankruptcy all property you own at the time of the bankruptcy filing is considered part of the bankruptcy estate. If you live in one of the nine community property states like California, Nevada, Arizona, Idaho, Louisiana, New Mexico, Texas, Washington, and Wisconsin, all of your spouse’s community property owned will belong to the community and will therefore be included in the bankruptcy estate as well. If both you and your spouse are filing for bankruptcy together you do not need to worry about what is considered separate property or what is considered community property. All property will be included in the bankruptcy estate. Make sure you disclose all of your separate property and community property to your bankruptcy lawyers.

If only one spouse is filing for bankruptcy, all community property will be included in the bankruptcy estate. Separate property of the non-filing spouse will not need to be included in the bankruptcy estate. In order to understand this concept you need to know what the difference is between separate property and community property. All property acquired during marriage is considered community property and owned jointly by both spouses. Employment earnings during marriage are considered community property. Conversely, all property owned prior to marriage, or acquired by one spouse during marriage by gift, bequest, or inheritance and the rents, issues, and profits from these properties are considered separate property. See Family Code §770. Additionally, all property acquired after a legal separation are considered separate property of the person acquiring the property. See Family Code §772.

Sometimes property is commingled during the marriage. If the property is so mixed up that you cannot determine what is considered separate property and what is considered community property, then the property will become community property. For example, husband has a checking account that is solely in his name prior to marriage. This checking account is considered separate property and all interest derived from this account is considered separate property. However, during the marriage he has his paychecks directly deposited into this account. He uses this account for everyday household goods. The paychecks deposited during marriage are considered community property. Even though this account started out as separate property the checking account lost its separate property status when community property is mixed in the account and it became too hard to trace what is considered separate property and what is considered community property.

So why is it so important to determine whether something is considered separate property or community property? Separate property owned by the spouse that is not filing for bankruptcy does not need to use his or her separate property to pay off community debts. Therefore, when one spouse is filing for bankruptcy, the non-filing spouse’s separate property assets are not thrown in the bankruptcy estate to satisfy creditors. The non-filing spouse’s separate property will not need to be protected and use up the exemptions. Only the community property of the couple will need to be protected his or her bankruptcy filing.

When only one spouse is filing for bankruptcy, it may be confusing to determine what is community property and what is separate property as some of these assets may be commingled. You should contact an experienced bankruptcy attorney before proceeding if you want to file for bankruptcy without a spouse.

Can I Waive the Filing Fee When Filing for Bankruptcy?

By Ryan C. Wood

The current filing fee to file a Chapter 7 bankruptcy case is $306. This fee may be a little out of reach for some individuals who are in financial distress and have to decide whether to use their money to pay their electricity bill or their phone bill. So what can these people do if they need to file for bankruptcy to get debt relief? There is some good news. If you file a Chapter 7 bankruptcy case you may be eligible for a fee waiver if your gross household income falls under 150% of the poverty guidelines for the number of people in your household. Currently, if you live within the 48 contiguous states, the 150% poverty level is $1,396.25 for a household of 1, $1,891.25 for a household of 2, $2,386.25 for a household of 3, and so forth. For a more complete list if you have more family members or if you live in Alaska or Hawaii, please consult with a bankruptcy lawyer in your area to help you determine if you qualify for a filing fee waiver. Filing fee waivers are granted or denied based on the discretion of the judge in your bankruptcy case. The bankruptcy judge looks at the totality of circumstances to determine whether or not to grant the fee waiver. The bankruptcy judge basically looks at your entire financial situation to see if you can afford to pay the filing fee.

Denial of Filing Fee Waiver

If the bankruptcy judge denies your application for a filing fee waiver, the judge has two options: 1) make the entire filing fee of $306 payable immediately (normally 5 to 10 days from the denial of your fee waiver) or 2) allow you to pay the filing fee in installments. These two options are also based on the discretion of the bankruptcy judge. In most of the cases I have seen the bankruptcy judge allows people to pay the filing fee in three to four installments. Please note this does not guarantee the same result for you. As previously indicated the judge has the discretion to choose any of the two options for you depending on your financial situation.

Are Fee Waivers Available in Chapter 13 Bankruptcy Cases?

Filing fee waivers are available in Chapter 7 bankruptcy cases but not Chapter 13 bankruptcy cases.  See Rule 1006(c) of the Federal Rules of Bankruptcy Procedure. Chapter 13 bankruptcy cases are normally filed by people that have regular income and are able to make monthly payments to a Chapter 13 trustee to pay a portion of their debts back in a chapter 13 plan of reorganization. Therefore, if you file a chapter 13 bankruptcy case with any number of bankruptcy lawyers you should be able to pay the filing fee as well.  If you cannot pay the entire amount immediately you may still apply to have your filing fees paid in installments. It is up to the discretion of the bankruptcy judge to grant or deny your application to pay the filing fees in installments.

Why You Should File Bankruptcy or Seek Counsel Sooner Rather than Later

By Ryan C. Wood

When it comes to bankruptcy, many of our clients wait until the very last minute before making the decision to schedule a bankruptcy consultation to find out if bankruptcy can help them. It has been ingrained in their heads that bankruptcy should be the very last option after all other options have been exhausted. This type of reasoning could potentially cost them lots of time, money, and sometimes even their homes. Bankruptcy is normally the last option, but seeking the counsel of an experienced bankruptcy lawyer when financial problems start is the best course of action. Here are some scenarios that come up most often during our consultations:

Debt Consolidation

Our clients often feel guilty about even considering bankruptcy because society has made it seem like they are bad people if they do not repay their debts. So they try to find other options to repay their debts. You hear about debt consolidation companies or debt settlement companies all the time on television or on the radio. “We can help you settle your debts for pennies on the dollar and you don’t have to file for bankruptcy!” That is one of the claims I have heard previously. This seems like the miracle cure and therefore people flock to these companies to try to save their credit and get them out of debt. Let me tell you a horror story from one of our previous clients: our client went to a debt settlement company. This company told her that if she paid them $1,000 per month for 36 months her debts would all be paid off. She had over $60,000 worth of debt, so this seemed like a great idea. She faithfully paid her debts for 2.5 years. She thought she was almost done (only 6 more months to go) and requested the company to provide her with a statement that shows what her remaining balance is. To her shock, the balance was higher than when she first started. That is when she came to see us for a free consultation. We realize that not all situations are the same and these debt consolidation or debt settlement companies may be able to help some people. It always depends on the situation, but most seem to be scams. One thing you need to do is make sure the debt consolidation/settlement company you speak to is a reputable company. You should always try to consult with a non-profit organization to help with debt consolidation/settlement. Our client could have saved herself $30,000 had she spoken with us first before going to a debt consolidation company.

Wage Garnishment

Some of our clients have already had their paychecks decrease significantly due to the wage garnishments levied against their paychecks. Filing for bankruptcy prevents wages from ever being garnished and stops all wage garnishments that have already started. Of course, whether you choose to file bankruptcy depends upon a number of factors. If your debts are burdensome and you cannot afford to pay your debts back you will save significant money when your wages stop being garnished when you file for bankruptcy sooner rather than later.

Loan Modification

A lot of homeowners do not consult with a bankruptcy lawyer while they are attempting to obtain a loan modification. The problem is that most of the clients that speak with us indicate that the lender tells them that they do not qualify for a loan modification days before their home is about to be sold in a trustee sale. I have had clients call me panicking because their house is going to be sold the next day. When I ask why they didn’t call me earlier, the answer is often “I’ve been trying to do a loan modification and only heard back from the lender today that I have been denied.” If the trustee sale goes through before you file for bankruptcy it is too late to save your home unless you have other defenses. It is a good idea to seek the advice of a bankruptcy attorney once you receive a notice of default to find out what your options are. Filing for bankruptcy does not bar you from proceeding with a loan modification.

Paying Credit Cards

Many clients continue to pay their credit cards even though they cannot afford to do so. They do that mainly by borrowing the money from other sources to pay their debts. They may do balance transfers or obtain payday loans to pay for their expenses. Some people have even taken money out of their retirement account to pay their debt. The retirement accounts are set up for a reason: to ensure you have money when you retire. If you take money out of the retirement account, that money will not be there when you retire. Even worse you will be hit with early withdrawal penalties and now you owe taxes. Borrowing money to pay credit cards usually only gets you in more debt. If you are in over your head with debts you need to seek the advice of a bankruptcy lawyer so that you do not incur even more debt.

This article is not saying that you should go out and file for bankruptcy at the first sign of financial trouble. You need to take a smarter approach and be realistic when you look at your finances. Will you be able to pay your debts back in a reasonable manner with realistic cutbacks on your expenses? If so, then you may not need to file for bankruptcy. If you are living from paycheck to paycheck and you have no spare money to pay back your creditors without having to borrow money from Peter to pay Paul, you should consult with a bankruptcy attorney to see what your options are sooner before later.