The “Means Test”
Here’s a simple explanation of how the means test, or whether or not your bankruptcy case will be allowed by the courts, works:
- If your family’s gross income is below Oklahoma’s published median income for your size of family, then the means test does not apply to you and your bankruptcy filing will not be challenged as a substantial abuse, unless other facts peculiar to your case indicate abuse.
- If your family’s gross income is above Oklahoma’s published median income, then the second part of the means test must be used. Your family’s net income for bankruptcy purposes is calculated by a complicated formula that uses IRS standard expense figures based on both national and local standards, making some allowance for your own special circumstances.
The means test only applies only to people whose debts are primarily consumer debts. If most of your debts are non-consumer debts (business or income tax debt), then the means test does not apply to you. In that event, you can file Chapter 7 regardless of your income and expenses, unless other factors indicate that you are abusing Chapter 7. Note: a Means Test has to be performed whether or not it applies to you.
“Exempt” property is the property you’ll get to keep in your bankruptcy. Bankruptcy law is federal law and is managed by the local federal court system. However, assuming you’ve lived here for the past two years, Oklahoma law determines your exemptions (the property you get to keep). The Oklahoma exemption law is generous. You’ll be allowed to retain most – and probably all – of your property, including the following items on this partial list of exempt property:
- Your home, regardless of value (if you’ve lived there, or in another Oklahoma homestead, for at least the past 40 months, otherwise up to $125,000 of equity value)
- All household and kitchen furniture
- Cemetery lots
- Farm equipment not to exceed $10,000 in value
- Tools of the trade not to exceed $10,000 in value
- Books, portraits and pictures of the household
- Up to $4,000 of wearing apparel per person
- Up to $3,000 of value in wedding and anniversary rings
- All professionally prescribed health aids
- Up to $7,500 wholesale equity or value in a motor vehicle per person (which can be combined into one $15,000 vehicle for joint filers)
- Guns, not to exceed $2,000.00 in aggregate value, that are held primarily for the personal, family or household use of such person or a dependent of such person
- 75% of any unspent portion of your last 3 months of take-home pay. (Don’t worry about what you’ve already spent on living expenses and bills in the past three months! This exemption applies to whatever money remains in your bank account or in your possession … and if that remaining amount in combined accounts is less than $1500 or so, you’re probably okay.)
- Your right to receive child support and alimony
- Any tax exempt retirement plan, including a 401K, Keogh, and IRAs, regardless of value or total
- The first $50,000 of any personal injury or wrongful death claim or lawsuit
- All workers’ compensation proceeds (100% exemption)
- Social Security, VA Disability, tax exempt benefits, most public service pensions
- Anything you receive from the federal Earned Income Tax Credit. Remember, your regular income tax refund is not exempt – only the Earned Income Credit. However, if your upcoming tax refunds – federal and state – are below $1500 (not counting whatever you get from the Earned Income Credit.), the bankruptcy trustee usually won’t take your tax refund
- Many other exemptions are available, especially for farm animals, pets like your teacup yorkshire terrier and supplies
Types of Debts
There are three kinds of debts in bankruptcy court:
Priority nondischargeable debts – These include federal and state income taxes less than 3 years old from the filing of the return or assessment. Also included in this category are child support, back child support, alimony, any debts you were ordered to pay in a divorce including property settlements (these are called Domestic Support Obligations), fraudulent debts, damages caused by drunk driving, embezzlement and similar debts, criminal fines. These debts are exactly what they are called… non dischargeable and filing bankruptcy won’t remove them.
Secured debts – These include any debt in which a creditor (the person or business you owe) holds a mortgage (or a “security interest” or “lien”) on your property. Common examples are mortgages on your home, liens on cars, liens on furniture and the like.
Unsecured debts – Common examples are credit card debts, medical bills, signature loans, and any other debt in which the creditor does not have a lien. In a Chapter 7, these debts are discharged entirely and the creditor forever loses his right to try and collect the debt. In a Chapter 13, the unsecured debts are paid with whatever is left from your disposable income.
When you have secured debts, you have 4 choices:
SURRENDER or return the property to the creditor in full satisfaction of the debt. Even if the creditor sells the property for less than the debt, all the debt is discharged.
REAFFIRM the debt and continue to make payments according to the original terms of the note. If you want to reaffirm, the creditor will normally require that you be current on your debt, or at least close to current. Thereafter, the reaffirmation can be rescinded (terminated) within 60 days of filing if you change your mind. If you default on the reaffirmation, the creditor has the right to repossess the property, sell it, and come after you for any deficiency. Therefore, you should be careful when reaffirming any debt.
REDEEM the property by paying the secured creditor the value of the property held as security. The creditor is not required to refinance a redemption. The redemption value is the current fair market value of the property and has nothing to do with the total due to the creditor.
FILE A CHAPTER 13. In a Chapter 13, you can repay the debt over a 3 or 5 year period. With secured debts, if the loan is over 2-1/2 years old (for motor vehicles) or over 1 year old (all other personal property), the debt can be “crammed down” to the fair market value of the collateral. In the case of a home mortgage, bankruptcy law says you cannot change the terms of the note and mortgage (the interest rate, the monthly payment, etc). However, on “unsecured debts” (credit cards, medical bills, small loans), creditors may be paid in full or may have to accept a percentage of the debt.