Category: Bankruptcy Information

Information about bankruptcy, the process, and some of the basics one should to be aware of

median income limits

2023 Median Income Limits to Nail Bankruptcy Means Test in Calif

Median Income Limits to Nail the Bankruptcy Means Test: New for 2023

The government just updated the numbers for 2023 median income limits. Using median household income, it again got easier to qualify for bankruptcy Chapter 7, because of another means test adjustment. And while bankruptcy may seem to be “just forms,” make sure you check out my list of 12 crucial tips to do or avoid before filing bankruptcy.

The means test for bankruptcy decides who qualifies for Chapter 7 bankruptcy eligibility. The first step of this process is comparing your median household income against the California median income limits set by the Department Of Justice guidelines to see if you earn less than bankruptcy median income limits.

Again, this comparison against the median income is merely the first step, and does not absolutely determine your eligibility for Chapter 7 or not.

March 2023 Update: The numbers for the means test adjust April 1, 2023, and will be used after that until late 2023.

Because of the above statement, these will be the second and updated 2023 median income limits.

The means test limits adjusts over time. So, someone may not qualify according to the bankruptcy means test in one month but after the changes they do, or vice-verse. The last updates were in April 2023 . Below are the April 2023 bankruptcy median income figures to determine who can file Chapter 7 bankruptcy.

Means Test: 2023 Median Income Adjustments

2021 median income limits
2023 median income numbers are much higher than in years past

Every now and then, the government updates the bankruptcy median income limits. They last did it in Apr 2023. Good news: the California 2023 median income numbers are yet even higher, increasing household income for bankruptcy means test qualifying. This means that more people could qualify for Chapter 7 bankruptcy using the California median income numbers below.

2023 Median Income for California Households

Because the California median income changes maybe once or twice a year, these recent changes will be the 2nd and updated numbers used for 2023 median income. You’ll see below there’s talk about household size. Notice also that larger families also get a break, as the amount for each additional member after 4 increases another $9,900. This is helpful for households of five people or more.

What is Median Household Income: Roommates and Spouses

When reviewing median household income, we start splitting hairs, since not every home is a traditional household. So, things start getting kind of cloudy on what is or isn’t a household. It isn’t always clear who counts in a household.

Note that if you’re married in California, there’s a community property presumption that your spouse’s income is yours also. So add that, and them, to your household figures. Yes, you can file bankruptcy without your spouse. However, their income, assets, debts, and everything else of theirs still comes into your bankruptcy. Why? California is a community property state. Read more for a deeper dive in my article about spouses and filing bankruptcy.

There may be a difference if you have a roommate who pays rent. What if you’re married? Separated? Or have kids but they’re adults. Do you live with your significant other, who has their own finances? Would the answer be different if you had kids together, but weren’t married? Maybe they’d all be considered by the government to be in your household. Or, maybe they’re not.

You can see this is isn’t as simple as it may at first seem. Contact me and set up a Zoom to talk about it.

But below are the California median income limits for the various household sizes.

California household size and California median income for Bankruptcy
  • 1-person household: $75,235 (up from $69,660)
  • 2-person household: $93,175 (up from $86,271)
  • 3-person household: $104,785 (up from $97,021)
  • 4-person household: $122,707 (up from $113,615)
  • Each additional person: $9,900

These are the California median income numbers effective April 1, 2023. If it’s later in 2023 or you’re looking for the median household income for a different state, please review the DOJ link.

Read Our Means Test Guide.

California Means Test Calculator for Chapter 7

Many of you have asked about a Means Test Calculator for Chapter 7. So, I put together the following Chapter 7 means test calculator. For other states, there many be others elsewhere on the internet, this won’t apply. This means test calculator for Chapter 7 bankruptcy is just for California.

Also, this is not intended to give advice or definitively say you qualify for Chapter 7 or not. The actual means test is many pages long, and it’s possible to qualify if your income is over the median. Similarly, it’s also possible to be ineligible for Chapter 7 even though your household income is under the median income. Reducing it to one box is like a cheap parlor game, and you should kind of think of this that way.

But notice how, after you input your income, how changing the household size affects the bottom line. As bankruptcy attorneys, this is something we have to be very mindful about and argue for our clients: the appropriate household size based on the unique circumstances of our clients.

With that being said, here’s my very crude 2023 Means Test Calculator for Chapter 7 for California, which you should take with a massive grain of salt:

Wait! Can you file bankruptcy if your household income is over the median?

If you’re over the bankruptcy median, there’s still hope

Yes. The means test and 2023 median income isn’t the “end all be all.” The above/below median part is just a starting point. A person can still file Chapter 7 bankruptcy, in some cases, even if they earn more than the median income. The bankruptcy means test would just need to be filled out completely. It’s still possible to qualify.

Over the years, this Los Angeles bankruptcy attorney has helped people who earn over the California median income limits still qualify for Chapter 7. In one case, we even helped a family whose annual income was almost double the median household income. They were earning around $150,000 a year, and we helped them get a Chapter 7 discharge (your mileage may vary). However, even if someone isn’t eligible, debt consolidation is still a solution in Chapter 13 bankruptcy.

Being Under the Bankruptcy Median Income Doesn’t Guarantee Success

On the other hand, just because someone is earning less than the California median income, it’s possible that they’re not eligible for Chapter 7 bankruptcy. Bankruptcy is all about whether someone can afford to repay their debt or not, and the means test is just one factor.

Note: the median income numbers are not to be confused with the Los Angeles County median home price figures, and each has a different place in evaluating Chapter 7.

Finally, as the economy is always changing, so does California median household income. We don’t know the next time changes to the median income limits will happen again. So, be sure to check before relying on these California median income limits in the future.

Contact Us and Let’s Find out If you Qualify

    Post-confirmation proceeds may or may not go into a Chapter 13, depending on circuit and judge.

    Post-confirmation Assets Part of a Chapter 13? It Depends

    Post-confirmation Assets in Chapter 13: Property of the Estate? Maybe.

    In a Chapter 13 bankruptcy, do Debtors have to pay the trustee new property they get after confirmation? The answer may surprise you.

    Your chapter 13 case is confirmed, things are sailing along, and then it happens: there’s an inheritance or personal injury reward or life insurance payout or large asset of new property. Is this property of the estate, or is this the debtor’s and excluded from the bankruptcy case?

    It all hinges on the tension between Sections 1306 versus 1327 of the Bankruptcy Code. Let’s see what all the fuss is about.

    11 USC 1306: All Property and Earnings are of the Estate

    Section 1306(a) of the Bankruptcy Code says that “Property of the estate includes, in addition to the property specified in section 541 of this title: (1) all property of the kind specified in such section that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 of this title, whichever occurs first; and (2) earnings from services performed by the debtor after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 of this title, whichever occurs first.”

    That seems clear. The estate counts all property and earnings after case commencement.

    11 USC 1327: All Property Vested in Debtor, unless Plan or Order Says

    Section 1327(b) of the Bankruptcy Code goes the other direction: “Except as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtor.”

    Well, that’s also pretty straightforward. It all goes back to debtor after confirmed. Further, subsection (c) says that it’s “free and clear of any claim or interest of any creditor provided for by the plan.” Again, fairly clear. It’s all debtor’s, so hands off.

    Assets acquired after Chapter 13 confirmation may be in or out of the estate property, depending.
    Assets acquired after Chapter 13 confirmation may be in or out of the estate property, depending.

    The Approaches to 1327 vs 1306

    Courts have taken five different approaches to this apparent conflict between sections 1327 and 1306. They range from “the estate is in effect until discharge, period” to “the estate is gone at confirmation” …with shades of gray in between. Let’s take a closer look.

    Estate Preservation approach: Mostly 1306

    First, courts utilize the Estate Preservation approach, which says that the vesting at confirmation doesn’t dissolve or eliminate the estate. The estate is still there and exists, and these cases rely heavily on 1306(a) and give very little weight to 1327. See, for example, the Eighth Circuit in Security Bank of Marshalltown, Iowa v. Neiman, 1 F. 3d 687 (8th Circuit, 1993).

    Modified Estate Preservation approach, aka Estate Replenishment Approach

    Second, there’s the Modified Estate Preservation approach used in the First Circuit. Barbosa v. Soloman, 235 F. 3d 31 (1st Circuit, 2000). This doctrine says that the preconfirmation property revests to debtor (1327b-c), but that postpetition income and assets fund the estate (1306a). Id. at 37, 42.

    Conditional Vesting Approach

    Third, another approach has emerged, the conditional vesting approach, which says that the debtor gets the immediate right to enjoy the bankruptcy estate, but it’s not final until debtor has faithfully executed their duties and gotten the discharge. Woodard v. Taco Bueno Rests., Inc., No. 4:05-CV-804-Y, 2006 WL 3542693, at 9 (N.D. Tex. Dec. 8, 2006). The problem with this approach is the clear language of 1327 which says it revests to debtor “free and clear.” Something isn’t free and clear if it’s conditional.

    Estate Transformation approach

    Fourth, some courts (think 7-11) use the Estate Transformation approach. The thinking here is that whatever is needed to fund the plan is estate property; everything else is controlled by the Debtor. Matter of Heath, 115 F. 3d 521, 524 (7th Circuit, 1997). Also see Telfair v. First Union, 216 F. 3d 1333 (11th Circuit, 2000).

    Estate Termination approach: Mostly 1327

    Finally, some courts give heavy credence to 1327, and consider 1306 with little to no weight. These courts state the all property revests to debtor at confirmation, and that the estate terminates at confirmation. See, for example, In re Dagen, 386 BR 777 (Bkry Ct, CO, 2008), In re Baker, 620 B.R. 655, 663, 667-68 (Bnkry CO, 2020), and In re Toth, 193 BR 992, (Bkry Ct, ND GA 1996), which followed In re Petruccelli, 113 BR 5 (Bkry Ct, SD CA 1990).

    So, what happens if you acquire an asset or income postpetition really depends on where you are, because of the circuit split. As many circuits haven’t yet ruled on it, it can often depend on who your judge is, and which approach persuades him or her.

    Ninth Circuit Decisions about Post-Petition Assets

    Jones in the Ninth Circuit: Estate Termination

    Locally here in California and the 9th Circuit, the matter was settled in 2009. That’s when the BAP took up, and the Ninth Circuit affirmed, In re Jones, 420 BR 506 (9th Cir BAP, 2009), affirmed by the Ninth Circuit Court of Appeals in 657 F3d 921 (9th Cir, 2011). There, the Bankruptcy Appellate Panel reviewed the four options, scrutinized the language of 1306 and 1327, and then held, “We agree with the bankruptcy court’s interpretation and adopt the estate termination approach for several reasons.” Id. at 514.

    While some feel the Estate Termination approach ignores 1306, the BAP reasoned it was just reading and applying it as written. It held: “Simply put, Section 1306 establishes the moment when estate property is first created and the outside triggering event which terminates property of the debtor from becoming estate property. Significantly, Section 1306 does not state that property of the estate can only become non-estate property when the case is closed, dismissed, or converted.” Id. at 515.

    Then, reviewing 1327, both (b) and (c), the Panel noted the verbiage changed between the two. “The change in language from “vests … property of the estate” to “property vesting in the debtor” is compelling to this Panel’s conclusion that confirmation changes estate property to property of the debtor unless the plan or confirmation order specifically provides otherwise.” Id.

    Automatic Stay, Asset Sales, and Motions to Modify Plan

    With the Estate Termination approach, whether the plan order says property revests in the debtor at confirmation or at discharge has big interplay with the Automatic Stay. If the estate is terminated and it revests with debtor, any post-petition debt can be collected against the debtor. But if the plan or order says property revests in the estate, then only post-petition assets can be collected against for the same debt (absent relief from stay).

    This is distinguished, at least locally, from the doctrine about what happens if debtor earns more income postconfirmation. This can often result in a Motion to Modify Plan Payments. Can the trustee file a motion to modify to increase the debtor’s plan payment? The answer, like most things in law, is it depends on your circuit. Spoiler of the previous link: locally, courts look at “good faith.”

    Also, what if an existing asset is sold during the plan but the estate doesn’t revest until discharge, the proceeds will have to be used to pay more of the bankruptcy debt. Black vs Leavitt (In re Black), 609 B.R. 518 (9th Circuit BAP, 2019). Note: an apparently contradictory ruling is reached in In re Marsh, Case No. 18-42471 (Bankr Ct, WD MO, 2023), where Judge Fenimore reviewed the five approaches for evaluating whether the estate terminates or not, and the found, “The court’s determination that the proceeds are property of the Marshes’ estate….” Again, vary wildly depending where you are, so know your law, and know your judge.

    The result can be different yet again if the inheritance was owned on the date of filing and pays monthly. If an inheritance doesn’t generate income, it can be excluded from being contributed to the plan. In re McGuire, Case No. 20-61183 (Bankr Ct, ND New York, 2022). There, Judge Diane Davis ruled, “this Court aligns itself with the minority bankruptcy court decisions that advance the analysis that ‘if the exempt asset in question is an anticipated stream of payments, it is included in projected disposable income; if the exempt asset is other than a stream of payments, it is not included.'” The Court did find that the existing inheritance is relevant for liquidation purposes, just like any other prepetition asset.

    Summing up

    Is a windfall (like an inheritance or injury or court award) received after a case is confirmed the property of the estate in a Chapter 13? Like the varying court rulings on Motions to Modify Chapter 13 Plan, postconfirmation assets are also jurisdiction-dependent. There are five different theories in various districts, and if you are in a district where the circuit court hasn’t ruled on it yet, be prepared to brief it, and it’s the judge’s pick which one they’ll go with. Hopefully this provided you a starting point, and good luck.

    Innocent spouse in bankruptcy fraud and the Bartenwerfer case

    Innocent Spouse, Bankruptcy & Fraud: Bartenwerfer v Buckley Summary

    Innocent Spouse, Bankruptcy & Fraud: Bartenwerfer v Buckley Summary

    Can the fraud of one spouse be imputed to an innocent spouse, thereby making the debt nondischargeable to both in a bankruptcy? Meet the Bartenwerfer family.

    February 22, 2023 update: The Supreme Court unanimously ruled that debt incurred by fraud is not discharged in bankruptcy, regardless of individual culpability. The Court parsed the plain language of Section 523(a)(2)(A), whose key language says “does not discharge an individual debtor from any debt … obtained by … false pretenses, a false representation, or actual

    The Court’s analysis read that Congress clearly was focused on the debt. Because of the passive voice of the statute, it pulls the actor off the stage.

    All of this said, innocent people are sometimes held liable
    for fraud they did not personally commit, and, if they de-
    clare bankruptcy, §523(a)(2)(A) bars discharge of that debt.

    The Concurrence: There is a more common sense analysis, which doesn’t expand the Court’s precedent of business agency culpability into marriage and spousal culpability. That’s the Sotomayor and Jackson concurrence. There, they focus on the fact that these spouses were found by the Bankruptcy Court to have an agency relationship, and obtained the debt after they formed a partnership.

    That argument didn’t win the day, however, as seven Justices still prevailed with the majority point that partnership or none, if you owe the debt obtained by fraud, you can’t discharge it in bankruptcy.

    Bottom line: The Supreme Court ruled unanimously that debt obtained by fraud is not discharged, period. This is regardless of the knowledge or intent of the debtor (such as a business partner, or in this case, an innocent spouse). Harsh, but clear.

    Jan 2023 update: this case is pending before the SCOTUS in 2023.

    Bartenwerfer v. Buckley Summary: the Supreme Court case

    The Supreme Court is set to rule on this very issue in 2023. This is an appeal of a bankruptcy case with an innocent spouse whose husband was found liable for prepetition nondisclosure which turned into a bankruptcy court finding of nondischargeable fraud.

    The basic facts are that Mr. Bartenwerfer (Debtor) sold a house to Mr. Buckley (Creditor), who then later found a bunch of undisclosed defects on the remodeled home. In fact, Debtor signed a statutory transfer disclosure statement which contained false representations that Creditor relied upon. Creditor sues. After three years at trial, a jury found Debtor liable for, among other things, nondisclosure of the defects. The jury also awarded Creditor, after reduction, about $250,000 in damages.

    Debtor then filed Chapter 7 bankruptcy, and to the surprise of nobody, Creditor followed him into the bankruptcy and filed and succeeded with a motion to have the nondisclosure portion of his quarter-million dollar judgment found nondischargable per 11 USC 523(a)(2)(A).

    The bankruptcy court then made a specific ruling in favor of Mrs. Bartenwerfer — Debtor’s spouse — was not liable for the debt. This was based on the facts that she didn’t live at the property after the renovations, she didn’t visit it again until Debtor and Creditor met there to sign the disclosure statement. The court also found she never spoke with the laborors, and had an agreement her Debtor husband that Debtor would assume responsibility and make it his full-time job to supervise the renovations. In re Bartenwerfer, 596 BR 675, 685-686 (NDCA, 2019)

    Innocent spouse in bankruptcy fraud and the Bartenwerfer case
    An innocent spouse should not be liable for the fraud of their spouse if they didn’t know about it

    The Split on Standards for Imputed Fraud to a Spouse

    SCOTUS is Strang: Fraud imputed without benefit or knowledge

    There are a few ways courts have approached this. One approach, the most absolute and the strictest, is that any agency imputes the fraud to others in the partnership.

    We start with the Supreme Court case of Strang v. Bradner, 114 US 555 (1885). Here, there was a business partnership involving wool consignment. The SCOTUS determined that one of the partners had committed fraud, and that was not discharged in bankruptcy. Turning then to whether the partner should also be held liable, it ruled that “we are of opinion that his fraud is to be imputed, for the purposes of the action, to all the members of his firm.” Id. at 561.

    The Supremes went on: “…if, in the conduct of partnership business, and with reference thereto, one partner makes false or fraudulent misrepresentations of fact to the injury of innocent persons who deal with him as representing the firm, and without notice of any limitations upon his general authority, his partners cannot escape pecuniary responsibility therefor upon the ground that such misrepresentations were made without their knowledge.” Id.

    Clearly, the Supreme Court back in 1885 considered the partnership business as one in which conscious decisions are made with regard to financial and pecuniary agency, and “…especially so when, as in the case before us, the partners, who were not themselves guilty of wrong, received and appropriated the fruits of the fraudulent conduct of their associate in business.” Id. While the SCOTUS discussed “fruits of the fraud” and benefits, other courts have ignored this as if it were dicta.

    Strang was followed by the Fifth Circuit, when it held “that innocent partners were precluded from discharging debts generated by their partner’s fraud even if they did not benefit monetarily from the fraud.” In re M.M. Winkler & Assocs, 239 F.3d 746, 748 (5th Cir.2001).” The 5th Circuit continued: “we hold that §523(a)(2)(A) prevents an innocent debtor from discharging liability for the fraud of his partners, regardless whether he receives a monetary benefit.” Id. at 751.

    There are other interpretations of this, which has led to some Strang bedfellows.

    Sixth Circuit: Receipt of Benefits

    A different standard involves benefiting from the fraud. Following Strang, and including as a requirement its language of “fruits of the fraudulent conduct” — that is, benefit from the fraud — is the Sixth Circuit. There, the Circuit Court held that “[T]he fraud in Strang was perpetrated within the scope of the partnership’s business, and, as in the case at bar, the innocent partners received the fruits of the fraudulent conduct.” In re Ledford, 970 F.2d 1556, 1561 (6th Cir. 1992).

    Again, in Ledford as in Strang, we have a business case where partners made a conscious decision to be bound by each other’s financial gains, losses, and wrongdoing.

    Eighth and Ninth’s Huh and Walker: Knew or should have Known

    The Ninth Circuit had adopted a standard that “more than a principal/agent relationship is required to establish a fraud exception to discharge. While the principal/debtor need not have participated actively in the fraud for the creditor to obtain an exception to discharge, the creditor must show that the debtor knew, or should have known, of the agent’s fraud. ” Sachan v. Huh (In re Huh), 506 B.R. 257, 271-272 (9th Cir BAP, 2014).

    This reasonable standard adopted from a long-established case in the the Eighth Circuit: “If the principal either knew or should have known of the agent’s fraud, the agent’s fraud will be imputed to the debtor-principal.” In re Walker, 726 F.2d 452,454 (8th Cir. 1984).

    Back to Bartenwerfer

    The Standards Used by Courts in Bartenwerfer

    With that review of standards, what happened in Bartenwerfer? Creditor appealed to the Ninth Circuit BAP, who remanded, asking the bankruptcy court to determine if spouse Mrs. Bartenwerfer was liable for the nondisclosure of defects using the “knew or should have known” standard in Walker v. Citizens State Bank, 726 F.2d 452 (8th Cir 1984). There was an evidentiary hearing, and a finding that Mr. Bartenwerfer’s fraud could not be imputed onto Mrs. Bartenwerfer because she did not know of the fraud. In re Bartenwerfer (9th Cir BAP NC-19-1016-TaFB, 2020). Citing Walker, the BAP wrote that the “bankruptcy court did not err in its determination that Mr. Bartenwerfer’s fraud cannot be imputed to Mrs. Bartenwerfer.” Id. at 11.

    In the appeal to the Ninth Circuit Court of Appeals, the 9th Circuit abandoned Huh and Walker, and held that the absolute “basic partnership principles” and that the SCOTUS strict agency precedent should make Mrs. Bartenwerfer liable for the nondisclosure of the defects. In re Bartenwerfer (9th Cir, 2021). The Ninth Circuit treated a the unknowing spouse like a business partner, and applied the formal agency standard to her, citing Strang, as well as In re Cecchini, 780 F. 2d 1440 (9th Cir, 1986).

    Which puts the case before the Supreme Court, where in late January 2023, it has agreed to review the issue.

    Strang should be limited to business agency

    Strang is a business case, and it should not be extended to marriages. There is precedent for this balanced approach.

    The Eight Circuit in 2001 followed the 11th Circuit in limiting the applicability of strict Strang to only business agency. “We agree with the Eleventh Circuit that Strang should not be extended beyond its basis in agency law to include the much broader sweep of § 20(a) liability.” Owens v. Miller, 276 F.3d 424 (8th Cir. 2001), citing Hoffend, 261 F.3d at 1153. If the spouse knew or should have known, then the Huh and Walker standard of liability would apply. This is the right balance and approach.

    It seems to be a stretch to apply partnership agency standards of imputing fraud to a marriage, particularly when there is an innocent spouse who does not meet the “knew or should have known” standard. In a business venture, both partners go into business and willingly realize and take the risk that there will be contracts, statements, and agreements. Both are savvy and assume these risks, gains, and losses.

    In a marriage, there is often one spouse much more knowledgeable in various topics, whether it’s keeping the checkbook or running the family business. When spouses say “I do,” while agreeing to love in sickness and health, the spouses are not knowingly agreeing to assume the burden of imputed fraud when their spouse secretly does wrong and commits fraud. Marriage is not a business partnership.

    It’s hoped that the Supreme Court in reviewing the issue and appeal from the 9th Circuit follows the logic and common sense of the 9th Circuit BAP, Walker, and Owens, and refrains from creating new obligations in marriages that harm innocent spouses for the fraud of the other.

    Tax Day can be postponed, which affects the 3-yr rule and their dischargeability

    How Bankruptcy Can Ditch IRS Tax: 3-Year Rule & Key Dates to Know

    How Bankruptcy Can Ditch IRS Tax: 3-Year Rule & Key Dates to Know

    Postponed Tax Filing Due Dates Impact Bankruptcy and the Three-Year Rule

    Taxes in bankruptcy don’t normally go away or get discharged. However, there are some exceptions to the rule. Sometimes, older tax debts can be discharged in bankruptcy. One of the keys is the due date of the taxes, which is not always April 15. Events can move the tax due date. These extensions impact the 3-year rule.

    One of the factors to determine bankruptcy dischargeability of tax debt is what we call the “three-year rule” per 11 USC 507. Note: there are factors that can stop (or toll) the three-year clock, so three years is not set in stone. See a bankruptcy professional or tax expert for analysis of your unique situation.

    The Three-Year Rule of Section 507

    Let’s start with the general rule. Section 507 of the Bankruptcy Code says, in part, at (8)(A)(i):

    Eighth, allowed unsecured claims of governmental units, only to the extent that such claims are for—
    (A) a tax on or measured by income or gross receipts for a taxable year ending on or before the date of the filing of the petition—
    (i) for which a return, if required, is last due, including extensions, after three years before the date of the filing of the petition;

    Taxes are due on Tax Day: April 15 each year, so this is easy, right? Not so fast. Notice the wording of that, when “last due.” If the taxpayer, for example, got an extension to file their tax return in a given year, the due date is no longer mid-April, but the extension date. So, it would be the extension’s due date from which the three years started.

    We’ll often count three years from the due date for the taxes of a given year, typically around April 15. However, this date can be moved by the taxpayer if the taxpayer got an extension to file.

    Plus, there are other factors which can move the tax due date: government action.

    Exceptions to the Rule: Governmental Extensions

    We saw that the taxpayer can ask for an extension to file their return, which changes the date that the taxes were “last due.” In addition, a government taxing agency can also move the date.

    This is often done to accommodate a region (or the entire nation) affected by a natural disaster, or even just a weekend or the day of the week. It can be extended by the federal government (IRS), the state tax authority, or both.

    Note: the following is not intended or meant to be an exhaustive list of every due date extension for all years, but only to highlight a couple which are relevant now in 2023.

    Due Date for Tax Year 2019

    So, yes, the tax filing due date can also be moved by the government. We saw this during the Covid-19 pandemic. The tax due date deadline to file federal and state 2019 returns was extended to July 15, 2020 due to the pandemic.

    As a result, filing bankruptcy on April 16, 2023 this year would likely have no effect on tax debt from tax year 2019. Why? It hasn’t been three years yet since the return, (absent extension or tolling events), was last due. At the very soonest, a bankruptcy would need to be filed on or after July 16, 2023 to qualify for the 3-year rule for tax year 2019. But again, there are other considerations to weigh that would make this date later, so ask your tax professional.

    Due Date for Tax Year 2022

    Locally here in California, there is another change in the tax due date. This time it affects taxes to be filed this year: tax year 2022. It hasn’t gotten much publicity, but the tax due date for Californians (state and possibly federal returns) this year’s 2022 returns is May 15, 2023 because of rain storms.

    That means that in 2026, filing a bankruptcy in mid-April of that year won’t discharge tax liability for tax year 2022. At the very soonest, the bankruptcy would need to be filed after May 15, 2026, possibly later depending on other factors which push the date back even further. See your tax expert for details.

    Chapter 7 reaffirmation agreement

    Chapter 7 Reaffirmation Agreement

    Chapter 7 Reaffirmation Agreement

    What is a reaffirmation agreement in Chapter 7

    A Chapter 7 reaffirmation agreement is where the evil creditor is trying to get you to owe money after the bankruptcy is over. This is of course a bad thing. But there’s one problem: in some cases, you have to sign the reaffirmation agreement. Note: one advantage of Chapter 13 bankruptcy is no need to reaffirm debts.

    2023 Update: Ride-through is back in California bankruptcy, which significantly impacts the requirement to sign a reaffirmation agreement. This is due to the passage of SB 1099, which has a number of changes in California law to help debtors filing bankruptcy.

    What does it mean to reaffirm a debt?

    To reaffirm a debt is to agree with the lender that you’ll continue owing a debt. You’re basically saying, “I’m good for it.” You’re giving the creditor the power to maybe take things from you and sue you if you ever break the agreement.

    Chapter 7 reaffirmation agreement
    Chapter 7 reaffirmation agreement is a bad idea, but sometimes necessary.

    For years prior to 2005, creditors approached people who filing Chapter 7 bankruptcy with “opportunities” to continue owing the debt. Sometimes, the lender would have a representative approach the debtor at the 341(a) Meeting of Creditors and pressure them to sign. This is, of course, because creditors are, in general heartless and evil.

    Chapter 7 Bankruptcy gets folks out of debt. Reaffirmation agreements stick people with debt. Smart Los Angeles bankruptcy attorneys would just tell their clients not to sign a representation agreement. Unfortunately, people without a bankruptcy lawyer would be intimidated or threatened into signing reaffirmation agreements even though they weren’t necessary, even for cars.

    BAPCPA Changed Reaffirmation Agreements in Chapter 7

    Luckily, to protect debtors from creditors, who are, again, mostly lacking a soul, Congress passed bankruptcy reform in 2005. These changes included Chapter 7 reaffirmation agreements. Now, if someone is financing a car they want to keep, they must sign a bankruptcy Reaffirmation Agreement. Thanks, Congress!

    When To Expect a Bankruptcy Reaffirmation Agreement

    On one of the many many bankruptcy forms you want a Los Angeles bankruptcy attorney to complete for you — the Statement of Intentions — the debtor has to… state… what their… intentions… are with regard to secured debts. A secured debt is one that involves collateral, usually something you’re financing (typically a house or a car). So the form gives people a chance to say what they’re going to do with the collateral. Simplifying, the choices are to keep it or give it back. If you want to keep it, you can expect the lender to send you a reaffirmation agreement. Not because it helps you. But because it gives them an insurance policy against you to whack you with in the future.

    But I need to keep my car in bankruptcy

    Los Angeles bankruptcy filers need a car, and most times if they already have one they want to keep it. Of course you need to keep your car in bankruptcy. If you want to keep a car with no equity in a bankruptcy, you need to do two things: 1) make your payments on time; and 2) complete, sign and return the bankruptcy reaffirmation agreement to the creditor if they send one.

    The Danger about Reaffirmation Agreements

    Beware: if you sign a bankruptcy reaffirmation agreement, and the judge approves it, and then you break it, you will not only lose the collateral, but owe the lender. This means the debt can come back to bite you where you owe thousands or even a lot more months or years into the future.

    Reaffirmation Agreements Are Evil

    So with regard to cars, if you’re going to sign a reaffirmation agreement in Chapter 7, you want to be sure that you can afford the car all the way to payoff and pink slip.

    Risk of not signing the reaffirmation agreement

    Remember the rule: if you want to keep a car that has no equity, you need to stay current on payments and sign the reaffirmation agreement. Why? Because you said you would on your Statement of Intention. And you must follow through on that if they send one.

    But if you don’t do what you said you’d do on the Statement of Intention, you shift the power to the car company. If you don’t sign the Chapter 7 reaffirmation agreement, the car finance company can repossess the vehicle, even if you’re current on payments.

    How much time do I have to do what I said in my Statement of Intentions?

    45 days, per 11 USC 521.

    So What Should I Do about the Reaffirmation Agreement

    Should you reaffirm your debt on the car loan or not? Heck if I know. This is just a website chock full of bankruptcy information, and doesn’t give legal advice. If you need legal advice, retain a Los Angeles bankruptcy lawyer. I happen to know a pretty darn good one (the “best bankruptcy lawyer” oh I don’t know but possibly the best bankruptcy lawyer for you).

    Conveniently, I put a form right next to this so you can contact Los Angeles bankruptcy attorney Hale Antico for your bankruptcy. Note: if you have already filed bankruptcy and have a Chapter 7 reaffirmation agreement, we don’t give advice. That’s just for clients who retained us to file their case.

    I do hope, however, that you find all the bankruptcy information I put on this lawyer website helpful. It really is my hope to demystify the scary unknown that is bankruptcy. Consequently, if it’s really something that would benefit you, you’ll hopefully see that it’s not a mystery but a tool that, when used properly, can be very effective and life-changing, for the better.

      Reaffirmation Agreements and Mortgages

      We haven’t even gotten yet to topic of reaffirmation agreements and mortgages. That is, quite simply, when your mortgage company sends you a reaffirmation agreement in Chapter 7. The law is different with regard to mortgages. The Statement of Intentions, where you again, state your intentions, has a box that lets you keep your house without reaffirming the debt. You have an affirmative duty to act on the intention you stated. And staying current on your mortgage while retaining the property is an option for a house, not a car. This concept is called “ride-through” and went away for cars with BAPCPA in 2005. It still exists for homes. You don’t need to reaffirm a house or give them to right to foreclose on it. Conversely, with cars, that’s exactly what happens.

      Mortgage Reaffirmation Example

      Let’s say you currently have a home valued at $300,000 and the mortgage has a balance of $250,000. You figure you love this house, it has equity, and you will never move and you want to reaffirm your mortgage debt. You sign a reaffirmation agreement in Chapter 7. Your Chapter 7 case finishes. Years go by.

      Oh no! The 2008 mortgage crisis happened again. Your home just lost half its value and you lost your job. It’s now worth $150,000 and you can’t afford the payments.

      If you stop paying, walk away, and let them foreclose on you, they get the house. But guess what they also get, nay, already have. That old Reaffirmation Agreement. They get to use that, even decades later, and go after you for the leftover on the mortgage loan you promised to pay. That can be a debt of well over $100,000 you still owe, and the old bankruptcy doesn’t help you. Why? Because you reaffirmed a mortgage.

      So Why Would You Want to Reaffirm a Mortgage Debt?

      Everyone can agree that even the possibility of owing tens of thousands of dollars at some point after bankruptcy is terrible. Yet, mortgage companies send their own customers these agreements. Why? Because they’re soulless ghouls. In the Central District of California, where this Los Angeles bankruptcy lawyer practices, no judge will approve a mortgage reaffirmation agreement in Chapter 7. Consumer bankruptcy attorneys want to protect their clients, and one way to do that is to not let them sign a Chapter 7 reaffirmation agreement for a mortgage that could end up haunting them twenty years in the future.

      The Postbankruptcy Mortgage Scam

      We’ve established that no sane person that understands what’s at stake would knowingly sign a mortgage reaffirmation agreement in Chapter 7. A bankruptcy attorney wouldn’t want their client to sign one. A judge won’t approve one in Los Angeles bankruptcy court. What can go wrong?

      What happens is, years after the bankruptcy, your mortgage company will tell you that they can’t / won’t perform some service for you. Why? You’re the customer and are paying your mortgage every month! They’ll say, “gee, remember that bankruptcy you filed? We sent you a reaffirmation agreement and your bankruptcy attorney didn’t let you sign it.” That is, because a decent bankruptcy lawyer protected you from them, they now turn around and deny you service, credit reporting, a refi, or some other perk. And it’s all the fault of your bankruptcy attorney, they say. The future you is outraged. “I can’t get a refi because the bankruptcy lawyer wouldn’t let me reaffirm my mortgage, which no judge would ever approve.” The present you understands because you read the example in the yellow box above, but the future you gets spun.

      Why would your mortgage company reject you, deny you some perk, or not report your on-time payments on your future credit report? Why would they punish you because you refused to let them have a hammer to hit you on the head with for a $100,000 debt in the future? Because they’re heartless callous monsters that are looking for a reason to punish you and turn you against the bankruptcy lawyer who protected you from them.

      They didn’t send me a Chapter 7 reaffirmation agreement

      Remember what it is: it’s basically a Motion to Make Debtor Owe a Debt in the Future sent to you by your car or mortgage lender. If they send you one for a car you intend to keep, you need to complete it. If they don’t send you a reaffirmation agreement, you still need to reaffirm within 45 days of the 341(a) meeting of creditors and do what you said you’d do in the Statement of Intentions. Otherwise, they have the right to repossess the vehicle without seeking relief from stay under Sections 521(a)(6) and 362(h).

      If you haven't filed bankruptcy yet, contact us now!

        Absolute Right to Dismiss Chapter 13 is a Happy Green Light

        9th Cir BAP: Actually, Absolute Right to Dismiss means Absolute

        9th Cir BAP: Actually, Absolute Right to Dismiss means Absolute

        Ninth Circuit Bankruptcy Appellate Panel finds no “eligibility” exception to right to dismiss a Chapter 13 bankruptcy

        Recent BAP ruling answers the question if debtor’s right to dismiss a Chapter 13 bankruptcy after Nichols is absolute, or if debt limit ineligibility restricts it.

        In re Powell is a recent Chapter 13 bankruptcy where the debtor tried to dismiss his case, and judgment creditor TICO fought the dismissal. and instead wanted Debtor’s case converted to Chapter 7. The Bankruptcy Court granted the motion to dismiss, citing the recent Nichols case.

        Powell vs TICO Construction (In re Powell)
        644 B.R. 181 (9th Circuit BAP, 2022)


        Did the bankruptcy court err in granting Debtor’s motion to dismiss the Chapter 13?




        This case tests the new “absolute right to dismiss” rule about Chapter 13 bankruptcies from the Ninth Circuit Court of Appeals Nichols case, and whether it applies even to people who could only file 7 and had no business in a Chapter 13 in the first place.

        Here, there was a dispute between an employer (Creditor TICO Construction) and one of its former workers, Jason Powell (Debtor). Creditor claimed that when Debtor left its employ to form his own company, he took trade secrets, broke his non-compete clause, and misappropriated proprietary information. This seemed to cause all sorts of bad blood.

        TICO then sued Debtor in state court, and got a judgment against Debtor for about $250,000, which it then recorded against all of Debtor’s property in Nevada. What should have been the end was only the beginning of the litigation between the two.

        Debtor filed for Chapter 13 bankruptcy relief. Creditor then filed a flurry of motions and complaints in the bankruptcy. Creditor challenged Debtor’s homestead exemption, asserted Debtor was over the unsecured debt limit and hence not eligible for Chapter 13. It also filed motions to value collateral. Creditor also filed adversary proceedings to have its debt found nondischargable under 523(a)(4) and 523(a)(6), alleging, among other things, hiding assets via transfers from Debtor to his ex-wife, who was really still his wife due to a sham divorce.

        It’s safe to say that Creditor believed Debtor was a bad actor guilty of fraud and bad faith, the exact type of person it felt that was not entitled to dismissal of a Chapter 13 under some case law. And that’s exactly what Debtor tried to do at this point. Having reached his own limit of the litigation and headaches, Debtor filed a motion to dismiss. Creditor said Debtor could not dismiss a 13, since he was never eligible to be in one in the first place, and wanted the case converted to a Chapter 7 or 11. The bankruptcy court granted the motion to dismiss. Creditor appealed to the BAP.


        The Bankruptcy Appellate Panel considered whether the absolute right to dismiss under 11 USC 1307(b) has an exception here, and concluded that it doesn’t.

        Section 1307(b)

        Section 1307(b) of the Bankruptcy Code says, “On request of the debtor at any time, if the case has not been converted under section 706, 1112, or 1208 of this title, the court shall dismiss a case under this chapter. Any waiver of the right to dismiss under this subsection is unenforceable.”

        That seems fairly ironclad, with words like “shall” and “at any time,” and even stating it can’t be waived. But as the BAP pointed out, this statute has somehow caused a split in the jurisdictions as to whether that right to dismiss is absolute.

        Review of Case Law

        The BAP then reviewed the case law. Some courts have held that it is indeed an absolute right to dismiss, regardless of findings of bad faith. In re Williams, 435 BR 552 (Bankr. Court, ND Ill, 2010). On the other hand, the Fifth Circuit has exceptions to the right to dismiss for bad faith or abuse of process. Jacobsen v. Moser (In re Jacobsen), 609 F.3d 647, 660 (5th Cir 2010).

        Locally, the Ninth Circuit has been in the latter camp for a while, when the 9th Circuit Court of Appeals denied Debtor’s request to dismiss because of bad faith. In re Rossom, 545 F.3d 764 (9th Cir, 2008), The Rossom ruling of no right to dismissal for bad faith cited the US Supreme Court in Marrama v. Citizens Bank of Massachusetts, 549 US 365, (Supreme Court, 2007), which denied the right to convert a case because of Debtor’s bad faith.

        In 2021, the Ninth Circuit then determined that Rossom was no longer good law, in light of the subsequent Law v Siegel ruling from the Supreme Court. In re Nichols, 10 F.4th 956 (9th Cir, 2021). No longer bound by Rossom, the Ninth Circuit in Nichols reviewed the Bankruptcy Code anew with a fresh eye. It found that “section 1307(b)’s text is unambiguous.” Id. at 963.

        The 9th Circuit in Nichols then held, “We conclude that § 1307(b)’s text confers upon the debtor an absolute right to dismiss a Chapter 13 bankruptcy case, subject to the single exception noted expressly in the statute itself.” Id. at 964.

        Back to 2022, Powell, TICO, and the BAP. After raising Marrama, the BAP quickly distinguished it, hinting that it doesn’t apply to the absolute 1307(b) right to dismissal by pointing to the Nichols case which overruled Rossom. “[A]s the bankruptcy court correctly held, the Ninth Circuit’s recent Nichols decision overruled Rosson and made clear that chapter 13 debtors have an absolute right to dismiss their case at any time, so long as the case had not been previously converted. Powell at 185.

        Creditor TICO raised the issue that because Powell was over the debt limit, he was never a Chapter 13 debtor, and thus, Nichols and 1307 didn’t apply. The BAP wasn’t buying any of it, saying that there was nothing in 1307(b) which limits it to eligible Chapter 13 debtors, and to rule this way would be to create a new limitation not found in the statute.

        In short, Nichols and 1307(b) even applies to people who had no business filing a Chapter 13. In the Ninth Circuit, the rule is clear: Marrama doesn’t apply to 1307(b), and after Law v Siegel, the statute’s plain text is unambiguous: it’s an absolute right by debtor that the court shall dismiss a case upon his request, if the case was not previously converted. Absolute really does actually mean absolute. Other circuits would do well to follow.

        Bankruptcy can toll or extend the statute of limitations using Section 108(c)

        Does Bankruptcy Toll the Statute of Limitations? 108c Top Points

        Does Bankruptcy Toll the Statute of Limitations? 108c Top Points

        Does bankruptcy’s automatic stay toll a statute of limitations for a creditor’s claim or judgment, or extend it in Calif and beyond. What to know.

        When a bankruptcy is dismissed or discharged, is the statute of limitations tolled on an earlier claim by the automatic stay, and suspended? Or is the statute of limitations extended by a few weeks with just a little bit of time tacked on? The answer could make a big difference on how much time the creditor has the act on their claim, lawsuit, lien, or other collection actions.

        Automatic Stay giveth, but what does it take away?

        Extending time using Section 108
        Live photo of someone extending time using Section 108

        You probably already know there’s bankruptcy protection in 11 USC 362 called the automatic stay. In short, this means that once a bankruptcy is filed, all collections against the debtor have to stop. This is powerful and effective. In a typical case that successfully ends with discharge, the debt is no longer collectable, ever.

        However, sometimes a Chapter 13 bankruptcy — sort of a years-long debt consolidation — doesn’t make it to discharge. If the case is dismissed, what happens to the statute of limitation timing on claims and judgments before the bankruptcy? Is the statute tolled (suspended), or is the timeline to collect extended?

        Suspend: Tolling of the Statute of Limitations

        Suspension would involve tolling the statute of limitations for the time in bankruptcy. A common example would be in California. Here, there’s a four-year statute of limitations for breach of contract. If three of those years have run, and then someone files Chapter 13 for two years before it’s dismissed, how much time remains to collect? If the statute was suspended or tolled, there would still be a year to file a law suit against debtor, post-bankruptcy.

        Extend: Add some time to collect after bankruptcy.

        Extension of time would be tacking on additional time to prosecute the case and file the lawsuit after the dismissal of the bankruptcy.

        Let’s look at the law and see what it says for guidance.

        Bankruptcy Code 11 USC 108

        Section 108(c) of the Bankruptcy Code says:

        …if applicable nonbankruptcy law, an order entered in a nonbankruptcy proceeding, or an agreement fixes a period for commencing or continuing a civil action in a court other than a bankruptcy court on a claim against the debtor, or against an individual with respect to which such individual is protected under section 1201 or 1301 of this title, and such period has not expired before the date of the filing of the petition, then such period does not expire until the later of—
        (1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or
        (2) 30 days after notice of the termination or expiration of the stay under section 362, 922, 1201, or 1301 of this title, as the case may be, with respect to such claim.

        What this means is that Section 108(c) kicks in regarding someone protected under Chapter 12 or Chapter 13 bankruptcies (1201 or 1301), so it wouldn’t apply in the more common Chapter 7 bankruptcy cases.

        It also specifically says that the period to commence or continue an action against the debtor doesn’t expire until the later of (1) the suspension of the period; OR (2) 30 days after notice of the stay ended, which sounds like an extension.

        What does this mean? Let’s go to the Bankruptcy Appellate Panel in the Ninth Circuit: “In simpler terms, unless the limitations period under applicable nonbankruptcy law would expire later, a limitations period that did not expire prepetition will expire thirty days after the expiration or termination of the automatic stay.” In re Brown, 606 BR 40, 47 (9th Cir BAP, 2019).

        So, there’s both suspension and extension. Are both in play as both are in the statute, or is it just one used practically, depending on jurisdiction? As usual, we look to the courts for interpretation.

        Statute of Limitations have been both extended and suspended, depending on which court interprets Section 108
        Statute of Limitations have been both extended and suspended, depending on which court interprets Section 108

        How the Courts have interpreted Section 108(c)

        Differing opinions on suspend or extend

        In the battle of suspend (toll) vs extend, the result seems to be specific to jurisdiction, facts, and the underlying nonbankruptcy law in play. The Supreme Court of the United States has weighed in: “Petitioners believe § 108(c)(1) contains a tolling provision. The lower courts have split over this issue.” Young vs US, 535 U.S. 43, 52 (Sup Ct, 2002).

        Lower courts have made the same observation. “They [the parties] differ in interpretation, however, with CPI finding no separate federal basis for tolling state prescriptive periods and Rogers arguing that § 108(c) itself tolls the prescriptive period. We are not the first circuit to face this issue. Panels of both the Second and Ninth Circuits have examined the language and legislative history of this section of the Code. Unfortunately, they have created a potential split in result. Other federal courts have divided likewise.” Rogers v. Corrosion Products, Inc., 42 F. 3d 292, 296 (5th Circuit, 1995)

        Statute of Limitations extended … A Little Bit

        Some courts have used Section 108 to merely extend the statute of limitations. One example: “We hold that Section 108(c) of the bankruptcy Code extends a creditor’s right to bring an action through the pendency of a debtor’s bankruptcy case only for 30 days after the automatic stay expires by operation of law or is lifted by order of court.” In re Baird, 63 BR 60, 63 (WDKY, 1986).

        While Section 362 doesn’t deal with time, Section 108 above has a few factors, and can extend contractual, statutory or judicial deadlines. Here’s the Second Circuit Court of Appeals: “…we observe that by its terms § 108(c) does not provide for tolling of any externally imposed time bars, such as those found in the two maritime statutes of limitations. The bankruptcy section only calls for applicable time deadlines to be extended for 30 days after notice of the termination of a bankruptcy stay, if any such deadline would have fallen on an earlier date.” Aslanidis v. US Lines, 7 F. 3d 1067, 1073 (2nd Cir, 1993).

        A mere 30-day extension can be challenging for creditors, and good news for debtors, as it’s not always certain creditors will get notice of the bankruptcy dismissal in 30 days. If that’s the case, the 30 days can go quickly and then the debtor is safe from any claims brought from that creditor.

        Suspended or Tolled Statute: California State Law CCP 356

        Let’s start with this nugget of a quote:

        “Although the automatic stay is a broad and powerful provision, it does not stay the passage of time.”

        That is from Judge Sidney Weaver in the case Matter of Lauderdale Motorcar Corp., 35 BR 544, 548 (Bankr. Ct, SD FL 1983). Judge Weaver’s quote is consistent with the Second Circuit above in Aslanidis, and would seem to be very friendly to debtors. They can’t run out the clock in a bankruptcy, but a small 30-day window puts the odds in their favor.

        But not so fast. Other courts (and state laws) have come to a different conclusion.

        In California, the automatic stay suspends time for the SOL

        Locally, in California, state law kicks in. We have CCP 356, which says: “When the commencement of an action is stayed by injunction or statutory prohibition, the time of the continuance of the injunction or prohibition is not part of the time limited for the commencement of the action.”

        “A bankruptcy stay has been held to be a ‘statutory prohibition’ within the meaning of Code of Civil Procedure section 356.” Schumacher v. Worcester, 55 Cal.App.4th 376, 380 (1997) . Later, this was cited by another California court, which added: “The provisions of sections 362(a), 108(c), and Code of Civil Procedure section 356, as well as the relevant case law set forth above, enforce our conclusion that the automatic stay provisions applied here to toll the limitations periods.” Kertesz v. Ostrovsky, 8 Cal. Rptr. 3d 907, 914 (Cal Ct of Appeal, 4th Appellate Dist., 3rd Div. 2004), but note limitations in law construction that focused on the 1872 enactment date of Section 356. Inco Development, Court of Appeal of California, Fourth District, Division Two, August 4, 2005.

        California law and the Discharge Injunction: also suspends time

        That’s all well and good. It seems to be settled in California that because of CCP 356, the Automatic Stay of Section 362 suspends (that is tolls) the statute of limitations. But does CCP Section 356 have the same effect on tolling because of the discharge injunction of Section 524(a)(2)?

        Surprisingly, the Ninth Circuit BAP says, yes, the discharge injunction also tolls and suspends time in California. To wit: “In sum, the Browns have not persuaded us that the discharge injunction is beyond the scope of C.C.P. § 356. To the contrary, we are convinced that the discharge injunction triggers the limitations period suspension provided for in the statute. Therefore, we reject the Browns’ principal argument on appeal.” Brown, 606 BR at 50.

        But Beware Phillips v Gilman for Postpetition Fees and Costs in a Bankruptcy

        When it comes to fees in a bankruptcy using nonbankruptcy statutes CCP 685.040 and 685.080, the Ninth Circuit BAP found that Section 108c doesn’t apply. Why? Because Section 108(c) involves seeking relief in a court other than a bankruptcy court; and that period must not have expired when the petition is filed. Both of these were missing.

        The BAP of the Ninth Circuit ruled, “By their conduct, Creditors demonstrate that CCP § 685.080 did not require Creditors to act “in a court other than a bankruptcy court“; this fact alone renders § 108(c) inapplicable to their motions.” In re Gilman, 603 BR 437, 445 (9th Cir BAP, 2019). Further, “[b]ecause all of the fees were incurred postpetition, CCP § 685.080’s two-year period did not commence prepetition and, again, § 108(c) does not apply.” Id.

        In short, as the Ninth Circuit Court of Appeals stated in an unpublished rejected appeal, “Section 108(c) does not apply here because Creditors filed their fee motions in the Bankruptcy Court for fees incurred after Debtor filed his bankruptcy petition.” Phillips v Gilman, unpublished, (9th Cir, 2020). The lesson? It’s in footnote 9 of the main BAP case: ” the bankruptcy court did not prohibit Creditors from filing CCP § 685.040 motions or memoranda at two-year intervals.”

        The Ninth Circuit Extends for Judgments

        Let’s go outside of California state law, but stay in the Ninth Circuit. What do we find there?

        In 1989, the Ninth Circuit weighed in on the issue when it ruled that Section 108(c) extends the limitations period so long as the creditor is barred by the automatic stay from enforcing its judgment against the property of the estate. Hunters Run, 875 F.2d 1425 (9th Circuit, 1989).

        That settles it, then, right? Not so fast. The 5th Circuit Court of Appeals found 9th Circuit’s ruling “opaque” when it ruled: “Again, the general question was whether § 108(c) applied to the time limits of enforcement actions of liens. The court held that it did and that the time period was “tolled.” The court did not decide whether the “tolling” meant that the time period ceased to run, or simply that a thirty-day grace period existed under the statute if the time period had run.” Rogers, 42 F. 3d at 296-297.

        The Hunters Run rule was discussed further in In re Spirtos, 221 F. 3d 1079 (9th Circuit, 2000), where the Ninth Circuit (not BAP) distinguished collecting on a judgment versus merely renewing a judgment. There, the Circuit Court recited what Hunters Run stands for, and then itself ruled the proposition that section 108(c) extends the limitations period so long as the creditor is barred by the automatic stay from enforcing its judgment against the property of the estate.

        More recently, in evaluating an ORAP lien, the Ninth Circuit held “that the period in which a creditor may execute on a lien constitutes the continuation of the original action that resulted in the judgment and is thus tolled during the automatic stay.” In re Swintek, 906 F. 3d 1100, 1102 (9th Circuit, 2018).

        The IRS, taxes, and 108(c)

        Generally, taxes, tolling, and the bankruptcy automatic stay

        Taxes are a very tricky issue in bankruptcy, much of it involving timing. As a rule, taxes are not dischargable in bankruptcy. The exception is that they can be eliminated if enough time has passed for various benchmarks.

        Section 6503(b) of the Internal Revenue Code states:

        The period of limitations on collection after assessment prescribed in section 6502 shall be suspended for the period the assets of the taxpayer are in the control or custody of the court in any proceeding before any court of the United States . . . and for six months thereafter.

        How does the IRC’s 6503 interplay with the Bankruptcy Code’s 108? Or put differently, what if someone is in a Chapter 13 during the three years the IRS has to collect taxes in their priority status of 11 USC 507(a)(8)?

        The Ninth Circuit BAP, citing Baird above, and reviewing Congress’ legislative intent, found that, “…it is clear that Congress, by enacting Section 108(c), intended to activate Section 6503(b) and thereby suspend the running of the statute of limitations for tax collection during a taxpayer’s bankruptcy proceedings.” In re Brickley, 70 BR 113, 115, (9th Cir BAP, 1986). Section 6503, then, takes over for Section 108, and the result for the tax clock is that it’s suspended. (But see In re Gurney, 192 BR 529, (9th Cir BAP, 1996), allowing the court’s Section 105 powers for equitable tolling balanced against the policy to prevent tax evasion schemes, limited in In re Gardenhire, 209 F. 3d 1145, 9th Circuit, 2000).

        The Ninth Circuit Court of Appeals found the BAP’s logic in Brickley persuasive, and followed it in In re West, 5 F. 3d 423 (9th Circuit, 1993). There, the 9th Circuit reviewed the 240-day rule of Section 507’s interaction with Section 108. Considering using bankruptcy for tax evasion, the Ninth Circuit concluded, “The debtors’ joint Chapter 13 case suspended the running of § 507(a)(7)(A)(ii)’s 240-day priority period from the date of the bankruptcy petition until six months after the case was dismissed. ” West at 427.

        Equitable Tolling and the Statute of Limitations in Bankruptcy

        Sometimes, courts find that it’s just fair to prevent someone from using bankruptcy in a tax evasion scheme. In those situations, equitable tolling is used to provide the taxing authority more time to collect the taxes.

        In the Young case discussed above, a person filed a Chapter 13 bankruptcy during the three-year lookback period, and then a Chapter 7 in an effort to run out the clock. The Supreme Court found equitable tolling, finding the just result was stopping the clock (ie: suspending) and the statute of limitations during the bankruptcy cases.

        In the Ninth Circuit, that was not the result when Brenda Jones filed a Chapter 13 bankruptcy, and then filed her California state tax return owing money. The Franchise Tax Board (FTB) didn’t protect its claim in the 13, and then years later, Jones dismissed her case and then filed a Chapter 7. The FTB wondered if it could maintain a postconfirmation tax claim if the prepetition property of the estate revested in the debtor at confirmation. Here, the Ninth Circuit Bankruptcy Appellate Panel distinguished from Young and found no equitable tolling because the FTB didn’t seek relief from the automatic stay or file a motion to dismiss in the 13 for its priority taxes. In re Jones, 420 BR 506 (9th Cir BAP, 2009).

        Summing up

        The bottom line is, well, there is no bottom line. Cases are all over the map, depending on the state, circuit, and underlying nonbankruptcy law. It would seem pretty straightforward that once a bankruptcy is dismissed, you just wait thirty days and hope you don’t get sued. However, there are many courts, states, and situations where the statute of limitations is tolled, that is stopped, while the bankruptcy and automatic stay is active.

        And so the short answer, like most things in law, is, “it depends.”

        It's possible to change a Chapter 13 plan payment

        Changing the Plan Payment in Chapter 13 Bankruptcy: What to Know

        Changing the Plan Payment in Chapter 13 Bankruptcy by Motion to Modify: What to Know

        A Motion to Modify can drop the Chapter 13 plan payment

        You can change your payment amount in Chapter 13 bankruptcy, and this is done by a Motion to Modify. It can lower your payment. But beware, someone can also raise it. Here is everything you need to know.

        So I can change my monthly payment for a Chapter 13?

        Yes. Of course, there has to be a reason (and I want more money for movies and travel isn’t good enough). Let’s look and see what the law says.

        Bankruptcy Code for Modifications of Plan: 11 USC 1329

        Section 1329 of the Bankruptcy Code is the statute or law that discusses when you can modify or change your Chapter 13 plan. Section 1329(a) is the common one that comes up. It says:

        At any time after confirmation of the plan but before the completion of payments under such plan, the plan may be modified, upon request of the debtor, the trustee, or the holder of an allowed unsecured claim, to increase or reduce the amount of payments on claims of a particular class provided for by the plan modification

        Let’s unpack this a little bit.

        At any time after confirmation

        This is saying that the plan can be modified after the case is confirmed. Confirmation is the stage of a Chapter 13 case where the proposal that we put together — the Chapter 13 Plan — is accepted and approved by the court. So, Section 1329 kicks in once the case is confirmed. Prior to that, it’s just a new proposal, which is what we can an amended plan. Amended, modified… they mean the same thing, but the rules and process can vary depending on the stage and if the plan has been confirmed.

        Before the completion of payments

        It’s very important that you can’t modify a Chapter 13 plan once all the payments have been made. Now, you might ask, “why would I want to modify the plan if I’m basically finished?” The answer is sometimes there are surprise claims or other things that spring up at the last minute. The trustee then demands a balloon payment to finish the case, which more often than not the debtor doesn’t have. Normally, you’d want to modify the plan, but if the last payment has been made, it’s too late.

        Plan can be modified upon request of debtor, trustee, or claims

        Quite often, one of my clients will ask to have their plan modified if their income has dropped during the plan term. Usually, Section 1329 and a Motion to Modify (or MOMOD) is the solution. We can typically lower the monthly plan payment to something that is affordable after the income change. (however, there sometimes are other factors in Chapter 13 like liquidation value, etc that require the payment to stay higher; your mileage may vary). So, debtor would want to file a MoMod, or a Motion To Convert to Chapter 7, as a solution to change in circumstances.

        While Section 1329 is helpful so that the debtor can try to lower the payment, this can go both ways. Trustee or a creditor can also file a motion to modify. Why would she want to do that you ask? Stay tuned:

        Increase or reduce the amount of payments

        There it is: the trustee (or a claim/creditor) may want to file a Motion to Modify to increase the payment. Why? Because there is more income available due to a new job or a pay raise. This typically would happen after the trustee sees the annual tax returns or pay stubs during the Chapter 13, and discovers the debtor can afford to pay more.

        The Standard: Section 1325, Good Faith, Substantial, Unanticipated

        Section 1329 Points to Section 1325: Good Faith

        What is the standard for the court to allow a modification? It’s spelled out in Section 1329(b)(1), which says, “Sections 1322(a), 1322(b), and 1323(c) of this title and the requirements of section 1325(a) of this title apply to any modification under subsection (a) of this section.”

        Section 1325(a)(3) says in pertinent part, “the plan has been proposed in good faith.”

        Substantial and Unanticipated?

        The Fourth Circuit Court of Appeals has held that “[a] debtor’s proposal of an early payoff [of a bankruptcy plan] through the refinancing of a mortgage simply does not alter the financial condition of the debtor and, therefore, cannot provide a basis for the modification of a confirmed plan.” In re Murphy, 474 F. 3d 143, 150-151 (4th Cir, 2007). It then went on to rule, “a debtor must experience a substantial and unanticipated change in his post-confirmation financial condition before his confirmed plan can be modified pursuant to §§ 1329(a)(1) or (a)(2).” Id. at 151.

        The Ninth Circuit instead interprets Good Faith

        9th Circuit BAP: substantial and unanticipated isn’t in the Bankruptcy Code

        However, closer to home here in the Ninth Circuit, the standard is different from that in the Fourth Circuit. “Notably missing from § 1329 is any express requirement that a substantial and unanticipated change in the debtor’s financial circumstances is a threshold requirement to overcome the res judicata effect of a confirmed plan under § 1327(a).” In re Mattson, 468 B.R. 361, 367-368 (9th Cir BAP, 2012). “The First, Fifth and Seventh Circuits have rejected this approach and do not impose on parties seeking to modify a confirmed plan the threshold requirement of the substantial unanticipated change test.” Id. at 368.

        Stick to Good Faith

        The Ninth Circuit Court of Appeals has ruled on this, providing a ‘good faith’ standard: “whether the debtor has misrepresented facts in his plan, unfairly manipulated the Bankruptcy Code, or otherwise proposed his Chapter 13 plan in an inequitable manner.” In re Goeb, 675 F. 2d 1386, 1390 (9th Cir, 1982). At footnote 9, the 9th Circuit in Goeb stated, “We emphasize that the scope of the good-faith inquiry should be quite broad.”

        And here’s what Good Faith is

        Now, back to Mattson, interpreting what good faith is. The 9th Circuit Bankruptcy Appellate Panel continued: [N]o single factor is determinative of the lack of good faith….. [D]eterminations of good faith are made on a case-by-case basis after considering the totality of the circumstances.” Id. at 371-372. “We continue to accept that a good faith analysis under § 1325(a)(3), although not an exact science, adequately guides the exercise of the court’s discretion for deciding plan modification issues.” Id. at 371. Summing up, it wrote: “At bottom, determinations of good faith are made on a case-by-case basis, after considering the totality of the circumstances.” Id. at 372.

        So, in the Ninth Circuit, the guidance is given that to modify a Chapter 13 plan payment, bankruptcy courts look at good faith, using their discretion, while reviewing the totality of the circumstances.

        lien in bankruptcy cars

        Liens in Bankruptcy: The Ultimate Guide, Explained

        Liens in Bankruptcy: The Ultimate Guide, Explained

        Liens in bankruptcy typically survive and don’t get affected by the discharge. However, there are exceptions where the lien can be reduced or even eliminated. I try to break these down in simple terms that are easy to grasp. But don’t be fooled: bankruptcy is more complicated than you think. Get a consultation with an attorney, and make sure you check out my list of 12 crucial tips to do or avoid before filing bankruptcy.

        What is a Lien in Bankruptcy?

        A lien is a security interest of a debt that encumbers a thing owned by the borrower until the debt is paid. One common example is a car and the car loan. The borrower who “owns” a car can’t just sell the car outright. He has to pay the debt secured by the lien against the car first. Then, once the debt is paid, the lien is satisfied and removed.

        Section 101(37) of the Bankruptcy Code defines “lien” as:

        charge against or interest in property to secure payment of a debt or performance of an obligation.

        How does bankruptcy affect a lien? The General Rule

        The general rule for liens in bankruptcy (and there are exceptions) is that bankruptcy doesn’t affect a lien at all. If a debt is secured by a lien and collateral, if you wish to keep the asset, then that debt will survive the bankruptcy. You don’t get a free house or car in bankruptcy. Here, let me put that in a fancy quote because it is so important:

        You don’t get a free house or car in bankruptcy.

        – Attorney Hale Andrew Antico

        There is a reason this is emphasized so strongly. For some reason — be it wishful thinking or confusion because the lender stopped sending statements or something else — people sometimes stop paying for a house or car. This is a mistake that can result in foreclosure or repo.

        house lien in bankruptcy
        Not really representative of a lien in bankruptcy, but it shows money and houses so pretend there’s a chain encumbering them.

        If you wish to keep the thing with a lien in bankruptcy (e.g.: your house), then you must continue to making regular payments on the loan or loans that goes with it. With that general principle out of the way, there are some specific exceptions or applications.

        Chapter 7 bankruptcy and Liens

        How does bankruptcy affect a lien in Chapter 7?

        Chapter 7 bankruptcy is the simpler bankruptcy. You don’t normally pay unsecured debts back here. But how does bankruptcy affect a lien in a Chapter 7? The short answer: liens don’t go anywhere. If you started a Chapter 7 with a debt secured by a lien, you will most likely end the Chapter 7 with a lien. Nothing changes. Let’s look at a few different things that come up.

        Vehicles in Chapter 7: You don’t get a free car

        Repeat after me: In Chapter 7 bankruptcy, you don’t get a free car. If you are financing a vehicle, if you want to keep the vehicle, you must keep paying the loan. No matter what happens, you must keep current and paying for the car (or truck or RV or quad or other secured vehicle) if you want to keep it.

        If your bank turns off your online access, you must keep current and paying for the car if you want to keep it. If your bank stops sending you statements or coupons, you must keep current and paying for the car if you want to keep it. If aliens abduct your Aunt Nana, you must keep current and paying for the car if you want to keep it.

        You must be wondering why I’m spending three paragraphs repeating something that seems quite basic. You know, the concept that you must keep current and paying for a vehicle if you want to keep it. This is because no matter how obvious, no matter how many times this is repeated, people still somehow stop paying for their vehicle because they read on some message board on Google Esq. that they get a free car in bankruptcy.

        But that’s false. You know why? Because there’s a lien on the car. And it remains. Why?

        Because you don’t get a free car in Chapter 7 bankruptcy.

        lien in bankruptcy car
        Lien in bankruptcy doesn’t go anywhere with regard to a car in Chapter 7 because you don’t get a free car in bankruptcy.

        Reaffirmation Agreements in Chapter 7

        Definition of Reaffirmation Agreement

        A reaffirmation agreement is an agreement where you … reaffirm a debt. This has the legal effect of you promising to owe a debt after the bankruptcy, no matter what. I think we can all agree that vowing to be liable on a debt regardless of what happens after a bankruptcy is the opposite of what bankruptcy is supposed to be.

        Why on earth would someone say, for example, yes, please, make me owe my mortgage balance even if I ever lose my house to foreclosure? You wouldn’t. Because that’s crazy. That’s what a reaffirmation agreement is: a contract where you make yourself owe a debt after the bankruptcy, regardless of what surprises the future throws at you.

        That is crazy. Why would I ever sign a reaffirmation agreement?

        Good question. You would never voluntarily promise to undo the bankruptcy for a debt on which you are trying to avoid personal liability. Again, it defeats the purpose of bankruptcy to say yes, I’d like to owe this debt after bankruptcy.

        Bankruptcy is intended to get you out of debt. Reaffirmation agreements are intended to get you back into debt.

        But you just told me I’ll owe the car debt after bankruptcy no matter what.

        Not quite. The example above is just talking about payments for a car that you intend to keep. If you want to keep the car, pay for it on time. What we’re talking about now is the possibility you lose the car or house or RV after the bankruptcy.

        Let’s say a year after the bankruptcy is done, an asteroid hits your employer and you lose your job and the can’t pay for the house or car. They repo or foreclose and you lose the thing, right? Right.

        But if you signed a reaffirmation agreement, you not only lost the house or car, but you also owe for the contract for the house or car you no longer have. Why? Because you signed a reaffirmation agreement. Can we agree that’s a bad outcome?

        Holy cow, that’s terrible. Why would I ever sign a reaffirmation agreement?

        You wouldn’t voluntarily sign a reaffirmation agreement unless you had to. And for vehicles, if you want to keep the collateral, you need to stay current on payments and you need to sign a reaffirmation agreement if they send one to you. For mortgages, you don’t generally need to or want to sign one. Any lender that tells you you needed one during your bankruptcy is mistaken, lying, or evil. Probably just mistaken.

        Note: the law is changing in California in 2023 to bring back bankruptcy ride-through. SB1099 will make it no longer a default on a car loan if you don’t sign a reaffirmation agreement for a vehicle.

        522f Lien Avoidance in Chapter 7: Judgment Liens

        Recap of the rule: liens in Chapter 7

        The rule for liens and lien avoidance in Chapter 7 bankruptcy is that the lien doesn’t go anywhere and you don’t get a free house or car in Chapter 7. If you started Chapter 7 with a lien on your car or a second mortgage on your house, you will likely end the bankruptcy with one, as there usually is no lien avoidance in Chapter 7. There can be one exception to this, and you have to qualify for it, contract for it, and yes, usually pay for it: judgment liens.

        Possible Exception: What is a Judgement Lien

        A judgment lien is when someone sues you, and as a result of the lawsuit, the judge rules against you. As a result, there is a now judgment against you. One way to collect on a judgment is a judgment lien against real estate or property you own or have an interest in. In California, the judgment lien cannot foreclose on you and take your house. However, it can sit there and grow with interest until you sell, refinance, transfer, or otherwise try to change the title. Then, it needs to get paid in full.

        Oh no. What is a Judgment Lien Avoidance in Bankruptcy?

        A judgment lien avoidance is where, in some cases, you can remove, or avoid, the judgment lien in bankruptcy… even Chapter 7 bankruptcy. Yes, it’s possible in Chapter 7 bankruptcy to avoid a judgment lien. However, it is not possible in every case, and doesn’t happen automatically. It’s extra work, and unless you contract for (and pay extra for) this extra work, the judgment lien avoidance won’t happen. Plus, the calculations around your home equity and lien amounts have to be right to qualify for it.

        What are the factors to qualify for Judgment Lien Avoidance?

        To qualify for lien avoidance in bankruptcy, we turn to Section 522(f) of the Bankruptcy Code, which says, in part: “the debtor may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled.”

        So, for judgment lien avoidance, you need to determine if the lien impairs an exemption. At its core, this is a simple math problem. Here, in the Central District of California, the form we use spells it out pretty clearly, as you can see below.

        522f judgment lien avoidance calculations
        522f judgment lien avoidance calculations from CDCA form F 4003-2.1.Avoid.Lien.RP.Motion

        The factors are pretty self-explanatory:

        • Value of Collateral: that’s what the house is worth
        • First lien: this is usually the primary deed of trust, or first mortgage
        • Amount of Debtor’s exemption: the amount of the exemption Debtor is entitled to

        Lien Avoidance Formula: Take the value of the collateral, then subtract the debtor’s liens which cannot be avoided, and then subtract the exemption amount. That’s the amount that remains to pay judgment liens.

        Still, this can be confusing. Read on!

        522(F) Judgment Lien Avoidance Calculator

        Below is a judgment lien avoidance calculator to help with the math of determining whether a judgment lien is impairing an exemption per 11 USC 522(f). You can only avoid the lien up to the amount it is impairing the exemption. If there is only partial impairment, there can only be partial judgment lien avoidance.

        Timing of amounts used for lien exemption

        If you learned of a judgment lien now but had an old bankruptcy where you didn’t avoid it, you may still be able to avoid the old judgment lien using the old bankruptcy. But exemptions change over time. Which home value and exemptions amount do you use?

        Chapter 13 Bankruptcy and Liens

        Section 506: Lienstripping a junior mortgage, mortgage cramdown, or avoiding a second mortgage lien

        What Does the lienstripping law say?

        There are really a few sections to focus on. First, section 506(d) of the Bankruptcy Code states, generally:

        To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void

        Making a lien void is a very good thing, and in Chapter 13 bankruptcy this can sometimes be done. The problem is it can’t be done all the time; the circumstances — and the math — have to be just right. Sometimes Sections 506(a) and 1322(b)(2) come into play in helping define what is secured.

        The 9th Circuit BAP clarified when this can be done in In re Lam, 211 BR 36 (9th Cir BAP, 1997). It was in this major ruling when the Bankruptcy Appellate Panel ruled, “The Nobelman decision holding that section 1322(b)(2) bars a chapter 13 plan from modifying the rights of holders of claims, secured only by the debtor’s principal residence, does not apply to holders of totally unsecured claims.” Id. at 41.

        liens in bankruptcy house
        Liens in bankruptcy regarding a house, this time with a chain encumbering it in rich symbolism.

        So, the key language in Lam is “totally unsecured.” Unlike avoiding a lien under 522(f) which can allow partial removal of a judgment lien, avoiding a consensual lien like a deed of trust or mortgage cannot be partially secured. “…a one dollar difference in property value could have a profound effect on a secured creditor’s rights.” Lam at 41. So the evidence for property value is key, and this can be where all the fight is.

        Lam Lienstrip Examples

        Let’s say Debtor has a home valued at $200,000 with a first mortgage of $225,000 and a second mortgage with a balance of $50,000. Because the second isn’t “touching” the secured house, it is totally unsecured and can be avoided with a lien-strip in a Chapter 13 bankruptcy. However, if that same property were valued at $230,000, then there’s about $5,000 of secured status for the junior mortgage. That’s enough to make it a secured claim, and then, because it’s not wholly unsecured, it cannot be avoided or lienstripped.

        I made a handy calculator where you can test out the above lien stripping examples yourself, and of course, your own numbers to see if it’s totally unsecured and qualifies in the Ninth Circuit for lien avoidance under Lam.

        If you are in the Los Angeles, Ventura, or Orange County, contact me and let’s go over your options.

        Section 522(f) and Judgment Liens in Chapter 13 bankruptcy

        Judgment liens, where for example, a credit card won in court against you and then liened your home, can be avoided in Chapter 13 if they impair an exemption. While there can be a huge benefit to removing a judgment lien in Chapter 13, it also wouldn’t be necessary if it’s a 100% plan. In other words, if you’re paying all your unsecured debt back, turning a secured debt to an unsecured one wouldn’t provide a whole lot of benefit but would increase legal fees. For a discussion – and a judgment lien calculator — see above in the Chapter 7 judgment lien section.

        What is Cramdown in Bankruptcy (Chapter 13)?

        Chapter 13 bankruptcy cramdown is where we can reduce the secured debt of a car to the fair market value of the vehicle. In other words, in Chapter 13, we can “cram down” the loan balance to what the car is worth if the loan was incurred over 910 days ago. The remaining debt gets paid through the Chapter 13 plan at the same percentage as the unsecured debt, potentially saving thousands of dollars on a vehicle loan.

        A bankruptcy cram down example would be if a vehicle loan was $30,000, and the car was only worth $18,000. In Chapter 13, it’s possible to only pay $18,000 for the car loan, and treat the rest of the car debt like credit card debt. Again, this wouldn’t make a lot of sense if it’s a 100% plan or there is some doubt you’ll be able to finish the bankruptcy with the car “in the bankruptcy” because if the case is dismissed, you’re now late on the loan which was being partially paid through the case, which is now ended. You’ll need to ensure you can get to the finish line if you take this route. However, the benefit can be valuable.

        Penrod and Negative Equity

        Is The Negative Equity PMSI?

        Penrod is not just a funny name, but a Ninth Circuit case. The Penrod case addresses trade-ins which had the old loan rolled into the new one, where the old loan is now called negative equity. We just learned that we can cram down a vehicle loan if the balance is more than the vehicle’s value if the debt was incurred over 910 days prior to filing. There is a way to remove the traded-in loan from the current loan, even if this happened in the 910 days before filing.

        Marlene Penrod traded in an Explorer and bought (and financed) a 2005 Ford Taurus. She rolled about $7,000 of her old Explorer loan into the new Taurus financing. Less than 910 days later, she filed Chapter 13 bankruptcy. In the case, she bifurcate, or split, the Taurus loan into two, and said she’d only pay the new Focus price in full as Purchase Money Security Interest (PMSI). The negative equity from the Explorer wasn’t purchase money, and therefore wouldn’t be secured.

        The new finance company objected, and the Ninth Circuit Court of Appeals agreed with Marlene Penrod when it wrote, “In sum, we find that a creditor does not have a purchase money security interest in the “negative equity” of a vehicle traded in during a new vehicle purchase.” In re Penrod, 611 F. 3d 1158 (9th Cir, 2010).

        Penrod and Gap Insurance and Extended Warranties

        Not only can negative equity can be removed from a vehicle loan in a Chapter 13 in the Ninth Circuit, other bankruptcy courts in the circuit have broadened this to other areas. For example, in Washington state, a bankruptcy court has held that Penrod also applies to removing gap insurance and an extended warranty. This is because, like negative equity, they are not part of the purchase money security interest. In re Jones, 583 BR 749 (WDWA, 2018).

        In Jones, the court ruled:

        Accordingly, this Court finds the Option Contracts are not part of the “price” of the Vehicle secured by the PMSI. Like negative equity, the Option Contracts are not sufficiently related to the purchase of the Vehicle. Unlike other expenses listed in Official Comment 3, neither the purchase of optional gap insurance or maintenance contracts are akin to sales tax and license fees, which are not optional but are required in order to obtain the vehicle.

        Jones at 755.

        It went on to write, “The Court concludes that Kitsap Credit Union’s purchase money security interest in the Vehicle does not secure sums advanced to pay for optional gap insurance and vehicle maintenance contracts.” Id. at 759.

        Tax liens in Bankruptcy

        Tax liens in bankruptcy generally don’t go anywhere. In Chapter 7, because they didn’t get paid, they survive the bankruptcy case. A tax lien in bankruptcy (Chapter 13) will have to be paid as a secured debt to avoid it and remove it. This can create feasibility problems in your Chapter 13 bankruptcy case, depending on the size of tax lien and secured debt. As always, discuss with a bankruptcy lawyer.

        In sum

        Liens in bankruptcy are generally not removed, and you don’t get a free car or house. Sometimes liens can be reduced, stripped, or avoided, if the math works out right in various situations. There is a lot more flexibility in Chapter 13 bankruptcy to reduce or even eliminate liens. Arrange a consultation with an experienced bankruptcy attorney in your area to learn your particular options. Thanks for reading.

        means test for chapter 7 bankruptcy

        Bankruptcy Means Test: a calculator, and a trick to pass (2023)

        Bankruptcy Means Test for Chapter 7 in California, and Everywhere Else

        Bankruptcy means test for Chapter 7 was created by Congress to decide if you qualify for liquidation or straight bankruptcy. Here is what it is, some answers to common bankruptcy means test questions, and a weird tip on passing the bankruptcy means test and its median income limits (ok, it’s not weird, but I think you’ll find it helpful).

        Historically, there was no bankruptcy income limit

        Before 2005, any income earner could, in theory, file Chapter 7 bankruptcy. There was a time in those days where a single person filing bankruptcy could earn $8,000 a month after taxes and still get a discharge. The credit card companies lobbied Congress to change the law and make it harder to qualify. In response, Congress passed a bankruptcy reform called BAPCPA in 2005. One of the new provisions was to add a means test so that the more someone earned, the harder it became to qualify for Chapter 7.

        What is the Bankruptcy Means Test

        The bankruptcy means test is a long form that asks how much money someone has earned recently. It starts by determining a) what your “current monthly income” is. Then, it compares that to b) a median income limit for their state, for a similar-sized household. If your income is less than the magic number, you pass the means test for Chapter 7. Consequently, you can file bankruptcy that way.

        Figuring Your Current Monthly Income

        Once you’ve figured out which income limit number is the standard for your state, you now need to compare against it your current monthly income. And like most things in bankruptcy, this is not as straightforward as it seems.

        What is Current Monthly Income on the Bankruptcy Means Test?

        How do you calculate current monthly income? Let’s start by saying what it’s not.

        Current Monthly Income is Not

        Current monthly income is not your current income, as reflected from your most recent paystub. Now, that might not make much sense, but this is law, and bankruptcy law, to boot.

        It’s also not what you put on your most recent tax return. While that is helpful information, and your bankruptcy attorney will want that for different reasons, the tax return actually has no place on the means test.

        Current Monthly Income is

        Put simply, the current monthly income is the average of all the income you’ve earned the past six months. Note the word “all” before income. It’s not just the gross income from your paychecks.

        It also counts most government benefits, bonuses you got from work, commissions, overtime, tips, and all those other deposits from Zelle and Paypal on your bank statements (speaking of which, see my list of 12 crucial tips to do before filing bankruptcy).

        But I don’t get to keep my gross income before taxes

        Notice that above I used the word “gross income” from your paycheck. You might think it’s not fair that they’re counting all the money you earned before Uncle Sam takes his cut with taxes and other payroll deductions.

        But that is the way Congress wrote the law, and the form. “Your gross wages” are literally the first words used when it’s time to input numbers on the bankruptcy means test. Don’t worry: there’s a place where we get to subtract taxes later if you earn “too much.”

        Check out our ultimate
        Chapter 7 bankruptcy guide

        Your State’s Median Income

        bankruptcy means test for chapter 7
        A bankruptcy attorney can skillfully complete the bankruptcy means test for chapter 7.

        I use the bankruptcy means test for California, because that’s where I am. If you’re someone else, you’ll use a bankruptcy means test calculator or complete it for your state. (and see below for a link to my simple California bankruptcy means test calculator).

        You ask, “what number do I compare my income against?” The short answer is, the income limit for Chapter 7 is the median income for your state based on your household size. This is a number that changes from state to state, from time to time, and is based on the overall economy.

        For cases filed after November 2022, the annual median income numbers are in a spreadsheet compiled by the Department of Justice Means Testing. In looking at the California median income, the annual one-person household median income now exceeds $60,000. You can read the specific and updated California median income limits that should be in use at least until the middle of 2023.

        Miscellaneous Bankruptcy Means Test Factoids and FAQ

        Does means test income count just me, or my spouse also?

        This comes up all the time. A couple is married, but only one of them is filing bankruptcy. This is where community property comes in. California Family Code Section 760 says that everything acquired by one spouse during the marriage is the property of both. Or put differently, both spouses’ paychecks, even though it has each name on it and maybe the other can’t spend it, is counted in the current monthly income of both spouses. This is regardless of which spouse files bankruptcy.

        Now, it’s true that your spouse doesn’t have to file bankruptcy with you. But even if they aren’t, the chances are very strong that your spouse’s income will count also. And this counts not just your spouse’s pay, but presumably all income from any source, including businesses and that Amazon or Etsy storefront.

        If I earn more than the California median income, does that mean I don’t qualify?

        Let’s say you’ve gone back and looked at every single paystub for the last six complete months. You counted all the overtime. You calculated that bonus, and you’ve input that insurance check and those DraftKings winnings. You annualize the number and you’re over the California median income for your household size (or your own state). If you’re over the line, you could still qualify for Chapter 7 bankruptcy.

        Just because you earn a smidge more than the median income limit for the means test doesn’t mean it’s game over. It just means that you need to do the second part of the bankruptcy means test. This is the part where you get to subtract some of your payroll deductions. It’s a combination of a) actual things you pay; and b) ‘standard deductions’ you get to subtract (regardless of what you actually spend).

        For example, federal and state taxes get backed out; voluntary retirement doesn’t. What you actually spend on health insurance counts; a set amount for rent and clothes is given to you regardless of what you actually spend.

        Explaining all the dozens of line-items of deductions is beyond the scope of this document. However, at the end of ten pages or so of taking things away from your gross pay and current monthly income, we reach disposable income.

        It’s possible that your current monthly income is over the state median income limit, but that your disposable income is low enough to still qualify for Chapter 7 bankruptcy.

        Learn about the median income limits
        used to qualify for Chapter 7 bankruptcy
        and try our Means Test Calculator

        So Do I Qualify for Chapter 7

        It’s common to wonder “Do I qualify for Chapter 7” since not everyone does. It’s really a two-step process. Firstly, do you earn under the median income limit for your state and household size. Secondly, if you don’t, is there enough to pull you back under. And thirdly, can you actually afford to repay some of your debt. This may all sound simple, but as you’ll see, there’s a lot of gray to consider. Just like it’s not really a two-step process.

        Note: If you’ve researched bankruptcy information, and the types of bankruptcies, you may have read that Chapter 7 bankruptcy is a faster, cheaper option to discharge debt. It’s not always better.

        Will I qualify for Chapter 7 if I earn more than the median?

        It’s common to wonder “Do I qualify for Chapter 7” even if you earn more than the median. Don’t panic, even if you earn more than the median income for your state and household size. It’s possible that you may still qualify for Chapter 7. The rest of the bankruptcy Means Test massive form requires a series of numbers filled in for expenses. In some cases, these monthly expense are what you truly spend. In others, it requires some standard expense number put out by the Internal Revenue Service. If you spend more than the IRS allowance, that doesn’t count. However, if done properly by a skilled bankruptcy attorney, it can still be possible to be eligible for Chapter 7 even if you make more than the median income.

        Allowable expenses in the means test

        It can be disappointing to learn that some real-life expenses don’t count in the bankruptcy means test. For example, there’s no box in which to put your fantasy football pool, or your season tickets to the Lakers (or opera). More realistically, we have no box for that money you send to your ex but it’s not court-ordered support.

        There is a box for food and clothes, but you get what the government averages give you, and that’s all. If you spend more than that, you’ve got an uphill battle ahead to prove why that should be allowable. An experienced bankruptcy lawyer will get to know you and your situation, and maybe think of a box that is a good fit for an expense that you may not have considered.

        Household Size and the Means Test

        Household size is a key component in the bankruptcy means test. It’s possible to pass the means test with a larger number, but not be under the income limit with a smaller household size. How many to use for isn’t always clear. For example, if you live with roommates, do you count their income as “heads on beds” even though they live in your home but you can’t access their income? Or if you have 3 kids you help support (one adult away at college, another adult working part-time living at home, and another under 18 but your ex shares custody), is your household size 1, 2, 3 or 4? These are very fact-specific determinations; there is no set answer. Contact a bankruptcy attorney to guide you through the means test.

        The One Weird Trick to Passing the Means Test

        Here it is. One weird trick to getting under the median income limit and passing the means test. And in a word, this is it: timing. In general, maybe you can’t control your pay, you can’t control your income, you can’t turn down overtime. But unless a creditor is about to garnish or foreclose or some other terrible thing, what you can control is when you file bankruptcy. And that has consequences… one of which could be positive if your goal is to get under the limit and file Chapter 7.

        An Online Bankruptcy Means Test Calculator Says I Don’t Qualify

        This lawyer will want to complete the means test

        First of all, don’t buy into those online bankruptcy means test calculators. I won’t, even if you swear it’s accurate. They’re not always spot-on, and every penny counts. Even if the means test calculator is using the correct California median income limits (or wherever), chances are that you didn’t input your FICA deductions, state income tax, (and others) for each paycheck. In the real world, that’s what we have to do. It never hurts to double-check. In fact, I’ll insist upon it.

        So, I will want to manually input all the numbers myself to be certain if you. There are lots of nuances a skilled bankruptcy lawyer can discern. It’s quite possible that after an experienced professional completes the means test you may pass where you thought you didn’t.

        Still, maybe after we plug in all the numbers, you don’t qualify for Chapter 7. No matter how skillfully done, it just might be the truth that you don’t meet the eligibility for the bankruptcy means test for Chapter 7 right now.

        Timing is everything.

        The good news is that someone who isn’t eligible for Chapter 7 now might qualify in the future. Heck, it’s possible you didn’t pass this month, but may next month. There is a strategy in timing, and one element we control is when we choose to file bankruptcy.

        To repeat something you’ve heard a lot by now, if we file your bankruptcy case today, we’re using the last six months. But guess what: filing bankruptcy next month will be a different six months than the current hand we’ve been dealt. If we file bankruptcy in seven months from now, that’s potentially an entirely different six months.

        How does “When” Factor into the Bankruptcy Means Test?

        One element of the Chapter 7 means test is which pay stubs to use for proof of income. The Bankruptcy Code defines “Current monthly income” in section 101(10A)(A) as all the income received in the six months before filing. If we wait to file your case now and file it later, that will be a different six months of income, and some of today’s “old” income will no longer count.

        Warning: there’s a very real downside if you choose to wait. You’re not protected from your creditors until you file. That means they can continue to harass you, give you a lawsuit, garnish your wages, foreclose on your house, and make your life miserable while we wait for the ideal time to strike. You really want to meet with a bankruptcy attorney as soon as possible. Contact me now and let’s chat.

        What’s the worst that can happen if I file Chapter 7 anyway

        If you don’t qualify, omit some of your income, or use the wrong household size, and file Chapter 7 bankruptcy anyway, the Department of Justice will send you a very official letter. It’ll state that in your case the presumption of abuse arises. Bankruptcy abuse is bad. It will then likely file a motion to dismiss the case, and you lose all that time and money. And out all that money, you’ll still need a bankruptcy.

        I’m not eligible for Chapter 7, Can I Still File Bankruptcy

        Not everyone is eligible for Chapter 7. However, even if you don’t pass the means test for Chapter 7, you still deserve debt relief. Consequently, there’s a bankruptcy option for you. You can file bankruptcy under Chapter 13.

        Chapter 13 bankruptcy isn’t terrible: it’s government-operated debt consolidation. You make some payments on your debt, freeze interest so you’re not paying minimums forever, and are protected from lawsuits. You’ll definitely want an experienced bankruptcy lawyer, and guess what: I’ve done hundreds of these.

        Contact us now and let me run your means test

        Reach out to me now. I can complete the bankruptcy means test for Chapter 7. You don’t need to commit to a full bankruptcy. Let’s just see if with all my experience I can get you under the income limits to pass the means test and if you qualify. If you continue with us, we’ll subtract the means test fee from the bankruptcy cost. Call or email — no obligation — and let’s set it up right now.