Two Important Changes to Bankruptcy Dollar Amounts

Coincidentally, two different sets of legal changes both became effective on April 1, 2013.

One set of changes was to the state-by-state “median income” amounts. These affect whether or not you would qualify to file a Chapter 7 “straight bankruptcy” case, and also how long you would have to pay into a Chapter 13 “adjustment of debts” case. These adjustments to the median income amounts are usually made twice a year, spring and fall-this spring on April 1.

The second set-involving nearly 50 changes-are automatic ones made every three years to many of the dollar amounts that are part of the Bankruptcy Code, to adjust for inflation.  By law these changes always go into effect on April 1 of every third year, including 2013.

Changes to the California Median Income Amounts

Here are the changes to the median income amounts for bankruptcy cases in California, depending on your family size, showing the new amounts, and right below those the prior amounts for the sake of comparison:

Notice that for each family size, the median income amounts increased, by about $1,000 to $1,500.

So what to these numbers mean? In a nutshell, they mean that it will be a little easier for people to file a Chapter 7 case, and for those people filing under Chapter 13 to have their cases not last as long.

Back in 2005, Congress decided to use median income amounts as a benchmark for these two purposes. Each state’s median income is that amount at which half of the population in that state earns more and half earns less, at each family size.

As you compare your income to these median income amounts, be aware that “income” for this purpose is different than you might expect, in two ways: 1) It is NOT based on your taxable income for the previous calendar year, but instead on the precise amount of income you received during the six full calendar months before your case is filed. 2) The income included for this purpose is not just your “taxable income,” but instead every bit of income you’ve received from all sources during that period of time, including irregular ones like child and spousal support payments, insurance settlements, unemployment benefits, and bonuses. The exception: exclude all social security income. Determine your average monthly income for those last 6 months, multiply that by 12 to come up with your annual income, and then compare that to the appropriate median income amount in the above table for your size of family.

For Chapter 7 qualifying, the median income amounts are part of the “means test,” which can get extremely complicated. For the purpose of this blog, if your median income is less than the amounts listed above, then almost certainly you qualify to file a Chapter 7 case. If your income is higher, you may still qualify, especially if it’s relatively close.

For Chapter 13 purposes, if you are under median income, your minimum plan length is 36 months, otherwise it is 60 months.

Three-Year Changes to the Bankruptcy Code

Here’s a summary of the statutory changes applicable to new bankruptcy cases filed starting April 1, focusing on changes most applicable to consumer bankruptcies.

Chapter 13 Debt Limits ( Section 109(e) of the Bankruptcy Code )

Maximum amount of unsecured debts to file a Chapter 13 “adjustment of debts of an individual with regular income”: increased from $360,475 to $383,175.

Maximum amount of secured debts: increased from $1,081,400 to $1,149,525.

Maximum IRA Exemption ( Section 522(n) )

Cap on exempt (protected) funds in individual retirement accounts (IRA): increased from $1,171,650 to $1,245,475.

Maximum Newer-Home State Homestead Exemption ( Section 522(p) )

Cap on homestead exemption, if you are using the state exemption and acquired the property within 1215 days before filing bankruptcy: increased from $146,450 to $155,675.

Presumption of Fraud for Discharge of Debts ( Section 523(a)(2)(C) )

Threshold amount for purchases of “luxury goods and services” made within the 90 days before filing bankruptcy to have them be presumed to be fraud (and therefore not dischargeable): increased from $600 to $650.

Threshold amount for cash advances made within 70 days before filing bankruptcy for them to be presumed to be fraud: increased from $875 to $925.

Chapter 7 Means Test Calculation ( Sections 707(b)(2)(A)(i)(I&II) and 707(b)(2)(B)(iv)(I&II) )

If your income is more than the applicable median income, determining if you can still file a Chapter 7 case involves a comparison between your disposable income and the amount of your unsecured debts, as well as certain set dollar amounts. Those set dollar amounts increased-in ways beyond what can be briefly described here-with the result that in some situations you can have somewhat more disposable income and still qualify for Chapter 7.

Length of Chapter 13 Plan ( Sections 1322(d) and 1325(b) )

To see if your plan will last 3 years or instead 5 years, when adding additional family member beyond 4: add $8,100 instead of $7,500 per family member. So in those situations you can have a little more income and still qualify for the shorter 3-year plan. To learn how this affects your ability to file for Chapter 7 or Chapter 13 bankruptcy go to Corona bankruptcy lawyer.