Chapter 7 bankruptcy eligibility requires the lawyer to look at your income over the past six months. If your average income less certain expenses leaves too much over then you may not qualify for Chapter 7 bankruptcy.
The issue of what is included in that average monthly income was recently addressed by Judge Carla E. Craig, Chief Judge of the U.S. Bankruptcy Court in Brooklyn.
Felix and Elizabeth Cotto are married and have a nine year old daughter. They filed for Chapter 7 bankruptcy and listed unsecured, non-priority debts of $115,243. When they outlined their Current Monthly Income, they did not add a union wage settlement in the amount of $10,711.14 received by Mrs. Cotto on February 20, 2009.
Mr. and Mrs. Cotto also deducted $5,725.06 from gross income for a LODI Tax Credit, and they understated Mr. Cotto’s monthly pension income by $563.04.
To add to the mix, Mr. and Mrs. Cotto overstated their allowable deductions and took improper deductions for ownership or lease expenses for two vehicles that were not otherwise scheduled, in the amount of $489 each.
So what did the Chapter 7 trustee do? He filed a motion to dismiss the case for abuse, claiming that, if the Cotto’s had properly calculated their income and expenses, they would fail the means test.
Mr. and Mrs. Cotto admitted that their deductions for the cars was incorrect, which leaves us with a few issues – the tax credit and the union wage settlement.
In the Eastern District of New York it has been said that income for the purposes of calculating the 6-month period “includes `every dime a debtor gets during the relevant period except for those amounts specifically excluded by § 101(10A)(B), like Social Security Benefits.’” In re Mendelson, 412 B.R. 75, 83 (Bankr. E.D.N.Y 2009) (quoting In re DeThample, 390 B.R. 716, 721 (Bankr. D. Kan. 2008)).
Mr. and Mrs. Cotto claimed that the wage settlement was a one-shot payment and should not be added into the income mix, but that doesn’t wash in the eyes of the court. So the one-time payment was added into the mix.
The court also said that the LODI Tax Credit should not be deducted from income because it was already deducted from her year to date gross income balance reported on her pay statements, and therefore that amount should not be deducted again.
In a last ditch effort to save their case, Mr. and Mrs. Cotto tried to claim that the one-time payment qualified as a special circumstance, thereby allowing them to rebut the claim of abuse. But the court didn’t buy the argument, saying essentially that if it’s counted as income, you can’t back it out because it’s a one-time payment.
At the end of the day, the Chapter 7 case thrown out. But what’s the lesson here? Well, there are a few:
- If you have money coming in during the six-month period prior to filing the case, you should assume that it will be counted as part of your income for the means test unless it’s specifically excluded in the law; and
- If there’s been a big chunk of money coming in during the six-month period prior to filing the case, you should be patient and wait to file for Chapter 7 bankruptcy.
The case, by the way, is In re Cotto (Case No. 09-43772-608, Bankr.E.D.N.Y. 2010).
Photo of the U.S. Bankruptcy Court, Eastern District of New York via Wikimedia Commons.
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