Florida Bankruptcy Law Blog

U.S.Trustee Seminar Helps Clarify Means Test Exemptions

The U.S. Trustee’s office in Orlando held a seminar to discuss their application of the Means Test. Among many interesting topics were the characterization of debts as either consumer debts or business debts. The distinction is important to determine if a prospective Chapter 7 debtor is exempt from the means test. If a debtor’s debts are primarily non-consumer debts the debtor is eligible to file Chapter 7 regardless of whether he passes the means test.

I frequently meet debtor’s who moved from an expensive home into a less expensive house as their principal residence. They rent the expensive house and use the rental income to pay the mortgage. The question is whether the mortgage on the expensive home is a business debt because it is rented at time of filing bankruptcy or a consumer debt because the mortgage was taken to purchase a primary residence for personal use. The Trustee’s position is that a house formerly occupied but currently rented will be a non-consumer debt if the debtor shows the mortgage was treated as business debt on a prior income tax return.

After taking out a first mortgage to purchase a residence some debtors use a second mortgage to finance their own business. When the proceeds from a second mortgage are used mostly to pay business expenses the second mortgage is a non-consumer debt for means test purposes.

Similarly, if a debtor’s obligation to a particular credit card company had been incurred primarily to pay business, or other non-consumer expenses the balance owed to that credit card company is non-consumer debt. The Trustee’s position is that the entire credit card balance is non-consumer debt and not just those charges used to pay non-consumer expenses.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

Could Prior Debtors File 7 Today?

I saw an interesting comment about the effect of the new bankruptcy law on Link: TPMCafe || The Bankruptcy Wars Continue. Apparently a study done by the Denver bankruptcy clerks office found that 80% of chapter 7 debtors who rushed to file just before the new bankruptcy law took effect would qualify for Chapter 7 under the new law. The primary difference between the old and new bankruptcy law for most debtors, the author says, is the amount of legal fees. He stated that his bankruptcy partner doubled his bankruptcy fee under the new law because of the amount of extra legal work required by the new bankruptcy law. Many consumers will be financially unable to file bankruptcy. The author doubts that credit card companies will actually see increased debt collections because more of their customers cannot take advantage of bankruptcy protection. If people can't afford a bankruptcy attorney they also likely cannot afford to repay credit card debt.

I agree with the comment to the TPM Cafe Blog. Most of my  own bankruptcy clients under the new law could qualify under the means test, and nearly all of our new clients in November are below median income and automatically qualify for the means test. It has always been my experience that people file bankruptcy as a last resort, and when they do file, they feel ashamed and embarassed about it. Few people who can afford to pay their debts seek bankruptcy as the easy way out. Most bankruptcy debtors have either little income or they have suffered devastating financial events such as illness or divorce.

posted by Jonathan Alper, asset protection and bankruptcy lawyer, Orlando, Florida