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The New Bankruptcy Code
 

Needs Based Bankruptcy of 707(b) - Explanation

Any creditor, the trustee or the court may force conversion of a Chapter 7 to Chapter 13 or 11 if the debtor's income is more than the median income in the state, and if the amount of the debtor's income left after deducting allowed expenses over 60 months is greater than $6,000.  If the income less expenses for 60 months is more than $6,000 but less than $10,000, conversion is required only if it is more than 25% of the nonpriority unsecured claims.

When the Means Test does not apply:

No means test is required if the current monthly income of the debtor and the debtor's spouse combined, as of the date of the order for relief when multiplied by 12, is equal to or less than--

(A) in the case of a debtor in a household of 1 person, the median family income of the applicable State for 1 earner last reported by the Bureau of the Census;

(B) in the case of a debtor in a household of 2, 3, or 4 individuals, the highest median family income of the applicable State for a family of the same number or fewer individuals last reported by the Bureau of the Census; or

(C) in the case of a debtor in a household exceeding 4 individuals, the highest median family income of the applicable State for a family of 4 or fewer individuals last reported by the Bureau of the Census, plus $525 per month for each individual in excess of 4.

707(b)(6 & 7)

At this time, we have been unable to locate a recent U.S. Census Bureau report showing a the Median Family Income for 1 earner, and households of 2, 3, or 4 individuals.  The closest available data is:

AZ Median Family Income
Number in Household 1989 1997
Non-family Households 17,487 22,033
Family Households 32,178 40,544
Households 27,540 34,751
See note below.

Note:  The 1989 figures are from U. S. Census Bureau's American Fact Finder - Arizona.  A 1997 model-based estimate for Arizona gives the Median Household Income as $34,751 in U.S. Census Bureau, State and County Quick Facts, Arizona, which is an increase of 26%.  The income for Non-Family and Family households in the chart above 1997 is extrapolated, and should not be relied upon.

The Means Test under 707.

Comparing net income with expenses:  A debtor can file Chapter 7 if his income less expenses times 60 is less than $6,000.  A debtor cannot file Chapter 7 if his income less expenses times 60 is greater than $10,000.  If the income less expenses times 60 is between $6,000 and $10,000, it must be less than 25% of the nonpriority unsecured claims. 707(b)(2)(A)(i) 

Allowable expenses:

  1. IRS National Standards expenses, plus if reasonable & necessary an additional 5 percent of the food and clothing categories. 707(b)(2)(A)(ii) (I) & (II)
  2. IRS Monthly National Standards Expenses
    IRS Handbook 105.1, Exhibit [105.1] 3-4 (09/26/96)
    Total Gross
    Monthly Income
    Number of Persons Each Person Over Four
    One Two Three Four
    Less than $830 315   509   553   714 +120
    $830 to $1,249 383   517   624   723 +130
    $1,250 to $1,669 448   569   670   803 +140
    $1,670 to $2,499 511   651   731   839 +150
    $2,500 to $3,329 551   707   809   905 +160
    $3,330 to $4,169 590   840   948 1,053 +170
    $4,170 to $5,829 665   913 1,019 1,177 +180
    $5,830 and over 923 1,179 1,329 1,397 +190
    Included in National Standards Expenses
    IRS Handbook 105.1, Exhibit [105.1] 3-2 (09/26/96)
    Apparel and services . Includes shoes and clothing, laundry and dry cleaning, and shoe repair.
    Food . Includes all meals, home or away.
    Housekeeping supplies . Includes postage and stationary; laundry and cleaning supplies; other household products: cleansing and toilet tissue, paper towels and napkins, lawn and garden supplies, and miscellaneous household supplies.
    Miscellaneous . A discretionary allowance. It is $100 for one person and $25 for each additional person in a taxpayer's family.
    Use of National Standards Expenses
    IRS Handbook 105.1, Exhibit [105.1] 3-4 (09/26/96)
    For each person in a family with more than four persons, add the amount in the "Over Four" column to the amount in the "Four" column.
    Normally, expenses should be allowed only for persons whom can be claimed as exemptions on the taxpayer's income tax return.
  3. IRS Local Standards expenses. 707(b)(2)(A)(ii)(I)
  4. IRS Local Standard Expenses for Arizona
    IRS Handbook 105.1, Exhibit [105.1] 3-6 (09/26/96)
    County Max
    Allowance
        County Max
    Allowance
        County Max
    Allowance
    Apache 550 Greenlee 640 Pima 865
    Cochise 793 La Paz 705 Pinal 732
    Coconino 857 Maricopa 1,012 Santa Cruz 798
    Gila 682 Mohave 808 Yavapai 833
    Graham 651 Navajo 695 Yuma 854
    Included in Local Standards
    IRS Handbook 105.1, Exhibit [105.1] 3-6 (09/26/96)
    Utilities . Includes gas, electricity, water, fuel oil, coal, bottled gas, trash and garbage collection, wood and other fuels, septic cleaning, and telephone.
    Housing . Usually, only expenses for the place of residence are considered to be necessary. Housing expenses include: mortgage or rent, property taxes, interest, parking, necessary maintenance and repair, homeowner's or renter's insurance, homeowner dues and condominium fees.
    Transportation . Vehicle insurance, vehicle payment (lease or purchase), maintenance, fuel, state and local registration, required vehicle inspection, parking fees, tolls, driver's license, public transportation. Transportation costs not required to produce income or ensure health and welfare are not necessary.
  5. IRS Other Necessary expenses--debtor's actual monthly expenses for the categories for:[105.1] 3.3.2.3 (09-26-1996)
    Other Necessary Expenses
    IRS Handbook 105.1, Exhibit [105.1] 3-2
    Accounting and legal fees . Fees are necessary only if they are for representation before the Service or they meet the necessary expense test of health or welfare and/or production of income.
    Charitable contributions . These expenses include donations to tax exempt organizations such as: civic organizations, religious organizations (tithing and educational), and medical services or associations. To be necessary, charitable contributions have to provide for the health and welfare of the taxpayer or taxpayer's family; or be a condition of employment.
    Child care . Baby sitting, day care, nursery, and preschool. Expenses are necessary if they meet the necessary expense test: health and welfare and/or production of income. Ensure that only a reasonable amount is allowed. Costs of child care can vary greatly. Don't allow unusually large child care expenses if more reasonable alternatives are available.
    Court ordered payments . Alimony, child support (including orders made by a state administrative agency), and other court-ordered payments. If the expense is already being deducted directly from a taxpayer's pay, do not include it again as an expense.
    Dependent care . For the elderly, invalid, or handicapped. This expense is necessary if there is no alternative to the taxpayer paying the expense.
    Education . Education is a necessary expense if required for a physically or mentally challenged child and no public education providing similar services is available. It is also a necessary expense if required as a condition of employment; for example, a teacher whose employment is conditional upon completion of a graduate program.
    Health care . Health insurance, medical services, prescription drugs, and medical supplies (including eyeglasses and contact lenses). A guide dog for someone who is visually handicapped is also allowable.
    Involuntary deductions . Deductions from income include FICA, Medicare, and union dues.
    Life insurance . To be necessary, insurance is limited to term policies. Life insurance used as an investment is not a necessary expense. Consider if the payoff of the policy is high compared to the lifestyle of the beneficiaries. Even for term policies, expensive premiums must be justified.
    Secured or legally-perfected debts . If the debts meet the necessary expense test of health and welfare and/or production of income, payments will be allowed for these debts. To be allowed, a taxpayer must substantiate that the payments are being made.
    Taxes . Current federal (including FICA, Medicare), state, and local tax payments. Delinquent state and local tax payments are necessary and, therefore, allowable depending on the priority of the Federal tax lien and/or Service agreements with state and local taxing agencies.
    Unsecured Debts . Minimum payments should be allowed if a taxpayer substantiates and justifies the expense. The necessary expense test of health and welfare and/or production of income must be met. Except for payments required for the production of income, payments on unsecured debts will not be allowed if the tax liability, including projected accruals, can be paid in full within 90 days.
  6. Expenses incurred to maintain the safety of the debtor and the family of the debtor from family violence. 707(b)(2)(A)(ii)(I)
  7. Actual expenses for care and support of an elderly, chronically ill, or disabled household member or member of the debtor's immediate family (including parents, grandparents, siblings, children, and grandchildren of the debtor, the dependents of the debtor, and the spouse of the debtor in a joint case). 707(b)(2)(A)(ii)(II)
  8. If eligible for Chapter 13, up to 10% of plan payments for Trustee's fees.  707(b)(2)(A)(ii)(II)
  9. With documentation and detailed explanation, actual private elementary or secondary school expenses of up to $1,500/year for each child under 18. 707(b)(2)(A)(ii)(IV)
  10. Payments on secured debts, calculated as:
    • Total due to secured creditors over 60 months, divided by 60, and
    • Additional payments necessary to maintain debtor's primary residence, motor vehicle, or other property necessary for the support of the debtor and the debtor's dependents, that serves as collateral for secured debts; divided by 60.
      707(b)(2)(A)(iii)
  11. Payments on priority claims (including taxes, child support & spousal maintenance) 707(b)(2)(A)(iv)