We’re in the middle of a recession. Many have lost their jobs. Many of those who still have jobs are experiencing pay cuts. Social Security recipients have just been told that for the first time in 30 years there will be no cost-of-living-adjustment increase in their monthly benefit payment.
And yet even as Americans are struggling to make ends meet on reduced incomes, changes are right around the corner that will make it harder for many of those struggling Americans to file bankruptcy. It’s like getting kicked while you’re already down.
Many who currently qualify to file Chapter 7 bankruptcy will find that on November 1 they no longer qualify.
Making it harder to file bankruptcy in the middle of a recession is exactly what Congress set in motion way back in 2005.
That was the year Congress passed some new bankruptcy laws at the behest of credit card companies. The changes were intended to make it more expensive and more difficult for people to file Chapter 7 bankruptcy.
One of the changes was the implementation of a “Means Test” the purpose of which was to force people out of Chapter 7 and into Chapter 13 bankruptcy. The credit card companies argued that there was widespread abuse and fraud being committed in the bankruptcy system and that many people were filing Chapter 7 bankruptcy and wiping out debt when those same people actually had the ability to repay a substantial amount of their debt in Chapter 13 bankruptcy.
The Means Test begins with an inquiry that asks whether a debtor is above or below the state median income for a household of the same size in the debtor’s state. The state median income figures are periodically updated by the U.S. Census and the Executive Office for U.S. Trustees (EOUST) publishes the figures that are used in bankruptcy cases.
With the recession, incomes are falling. These falling incomes are represented in the updated state median income figures which have generally also declined.
For example, right now in Oklahoma, a filer from a 2-person household presumptively fails the Means Test if he or she has median income above $51,322. On November 1, that will change to $50,891.
This means that a person from a 2-person household with an annual income of $51,000 currently passes the Means Test and qualifies for Chapter 7 bankruptcy. However, after November 1, that same person will presumptively fail the Means Test and could be forced into Chapter 13 bankruptcy.
However, the changes are not consistent across different sizes of households. For example, in Oklahoma the median income figures drop for 2 and 4-person and greater households (making it harder to file chapter 7 bankruptcy) but rise for 1 and 3-person households.
Some might say that I’m making a mountain out of a molehill. How many people are really going to be affected by a change of a few hundred dollars in the means test’s median income figures? Well, maybe not a lot, but with bankruptcy filings headed toward at least 1.5 million bankruptcy in 2010, also not just a few.
Regardless of the number of people who are affected by the change, what concerns me more is the symbolism of making personal bankruptcy less available during a time of economic crisis. These sorts of changes feed the perception that the government will help out large financial institutions but not the common man and woman.
This post is not meant to alarm anyone. If you’re thinking about filing bankruptcy, there’s no reason to panic. If you’re well below the state median income for a household of your size, the new updated figures will not affect you. Even people who are above the state median income often still qualify for chapter 7 because they have certain allowable expense deductions. But, if your income is near your state’s median, you might want to talk with a bankruptcy lawyer before the new income figures take effect on November 1.
