Articles Posted in Government Benefits

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PublicDomainPictures [Public domain, CC0 1.0 (http://creativecommons.org/publicdomain/zero/1.0/deed.en)], via PixabayThe loss of a job is one of the biggest factors that lead people to file for Chapter 7 and Chapter 13 bankruptcy. State and federal programs exist to assist people who have lost their job and are looking for a new one. When losing a job puts a person in such financial distress that they must consider bankruptcy, the question emerges as to whether or not unemployment benefits constitute “income” for the purposes of a bankruptcy case. The short answer to that question is yes, it is considered income. The answer can be more complicated, however, when applied to specific parts of the bankruptcy process, like the Chapter 7 means test.

California, like most states and the federal government, maintains a system of unemployment insurance (UI). Employers pay into the insurance fund, which is available to pay temporary benefits to qualifying former employees. In order to qualify for benefits, individuals must have lost their job through no fault of their own, such as through a layoff; must have received a minimum amount of wages during an earlier 12-month period; and must be physically capable of working, willing to work, and actively seeking work. The amount provided through these programs is usually not much, but it at least keeps people from losing any and all income.

The general rule in bankruptcy is that unemployment compensation received through state or federal UI programs is included in a debtor’s income calculations. Chapter 7 bankruptcy cases rely on a “means test” based on a debtor’s “current monthly income.” A debtor whose “current monthly income” is greater than a certain amount, determined by a rather complicated formula, is not eligible for Chapter 7 bankruptcy. 11 U.S.C. § 707(b)(2). Some courts disagree on whether this income calculation includes unemployment compensation.

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old manSeniors, generally defined as people age 65 or older, comprise a growing percentage of the U.S. population. According to the Administration on Aging, part of the U.S. Department of Health and Human Services, seniors accounted for 14.5 percent of the population in 2014. That percentage is expected to increase to 21.7 percent by 2040. A greater and greater number of people want to retire, or are no longer able to work, and must rely on various types of fixed income. Increased health care costs for the myriad medical issues that seniors face will become an increasingly pressing concern. While specific debts are not necessarily passed on to a person’s heirs, creditors can cause considerable havoc in a person’s estate. Seniors who find themselves in financial distress may find that bankruptcy offers some solutions. Many types of income that seniors receive are exempt from creditors both before and during a bankruptcy case, and many debts commonly associated with seniors are unsecured and therefore subject to discharge in bankruptcy.

Debtors filing for personal bankruptcy usually choose between Chapter 7 and Chapter 13. In a Chapter 7 case, a debtor’s non-exempt assets are liquidated to pay debts, and the court discharges most debts at the end of the case. A Chapter 13 case involves a repayment plan that lasts several years, followed by a discharge. While some debts are not subject to discharge, bankruptcy can result in having most of one’s unsecured debts wiped out.

A California debtor filing for bankruptcy has two options for claiming property as exempt under California law. The first system allows exemptions for seniors that include up to $175,000 of the equity in their residence, up to $2,300 in motor vehicles, and up to $6,075 in “jewelry, heirlooms, and works of art.” See Cal. Code Civ. P. §§ 704.010 et seq., 704.730. The second system does not include a specific homestead exemption but allows multiple other exemptions and a “wildcard” exemption for property valued up to $24,060. Cal. Code Civ. P. § 703.140.

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money bagThe federal government is perhaps the most tenacious creditor of them all, and it goes to great lengths to recover money it believes it is owed. This applies not only to taxes but also to benefits, such as the Social Security Disability Insurance (SSDI) program. A bankruptcy court in California, for example, recently considered the government’s claim for recoupment of about $190,000 in SSDI overpayments from a debtor’s future benefit payments. In re Angwin, No. 15-bk-11120, Adv. Proc. No. 15-ap-01080, mem. dec. (E.D. Cal., Apr. 5, 2016).

The Social Security Administration (SSA) administers the SSDI program and other federal benefits programs. The eligibility requirements for SSDI benefits are complicated, and the application process is often quite cumbersome. Once a person is approved to receive benefits, the burden is largely on that person to report any changed circumstances that might cause a reduction in benefits payments. If the SSA determines that it has been overpaying someone, it will assess an overpayment amount. It can withhold benefits payments in their entirety until that amount is satisfied, 20 C.F.R. § 404.502(a)(1), or pursue other means of enforcement.

The automatic stay prevents efforts to collect on a pre-petition SSDI overpayment while a bankruptcy case is pending. An overpayment is also potentially subject to discharge in bankruptcy, unless the SSA can establish an exception. The Angwin court addressed two possible ways for the SSA to assert its claim. The doctrine of setoff applies when a debtor and a creditor owe each other money prior to the bankruptcy case. 11 U.S.C. § 553. It allows the setoff of an amount owed to one party equal to the amount owed to the other party, and it treats that amount as secured debt. Id. at § 506(a)(1).

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Luc Viatour [GFDL (http://www.gnu.org/copyleft/fdl.html), CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0/) or CC-BY-SA-2.5-2.0-1.0 (http://creativecommons.org/licenses/by-sa/2.5-2.0-1.0)], via Wikimedia CommonsFederal law allows bankruptcy courts to dismiss a Chapter 7 petition if it finds that granting a discharge of debt would constitute an abuse of the bankruptcy system. A debtor must overcome a presumption of abuse by using the Chapter 7 “means test” to show that their income and assets are below a certain amount, and courts may consider several other factors in determining whether abuse has occurred. A bankruptcy court in Santa Ana, California reviewed the grounds for dismissing a petition last year, offering an overview of the applicable federal statutes and Ninth Circuit cases. In re Suttice, 487 B.R. 245 (Bankr. C.D. Cal. 2013).

The debtors in Suttice filed a Chapter 7 petition with financial documents that reportedly met the requirements of the means test. The debtors’ financial statements, however, showed combined monthly income of just over $8,500, including $1,100 in social security benefits, and monthly expenses of about $7,600. This appeared to give them monthly surplus income of almost $900. The trustee filed a motion to dismiss for abuse about a month after the case was filed.

A court may dismiss a Chapter 7 case for abuse for failing to pass the means test, 11 U.S.C. § 707(b)(2); upon a finding that a debtor filed a petition in bad faith, id. at § 707(b)(3)(A); or based on the “totality of the circumstances,” id. at § 707(b)(3)(B). The trustee based his motion on this last provision. He cited several factors established by the Ninth Circuit for a “totality of the circumstances” inquiry in In re Price, 353 F.3d 1135 (9th Cir. 2004), specifically claiming that the debtors had sufficient income to fund a Chapter 13 plan. The debtors argued in part that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) had supplanted Price, and that their social security benefits should not count towards a Chapter 13 plan. Continue reading

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Walletssn2A bankruptcy filing requires a debtor to make an extensive inventory of their assets, debts, and sources of income. In a Chapter 13 bankruptcy, the debtor must obtain the court’s approval for a plan to repay debts. In addition to employment and investment income, a debtor may receive income from government benefits such as Social Security. A federal court of appeals recently affirmed that a debtor may exclude Social Security income from the calculation of disposable income and still meet the good faith requirement of a Chapter 13 bankruptcy plan. In re Walsh, No. 12-60009, slip op. (9th Cir., Mar. 25, 2013).

The debtors in the Walsh case, a married couple, filed for Chapter 13 bankruptcy in May 2010. Among their assets listed for the court were a house valued at $400,000, but in which the debtors only had about $70,000 in equity; and multiple vehicles, only one of which had a value in excess of its indebtedness. They also listed over $180,000 in unsecured debt. Their total income was greater than the median for their state, so their disposable income calculation was based on the “means test” defined in 11 U.S.C. § 707(b)(2). They listed total monthly income of just over $8,000, including the wife’s employment and pension income, and the husband’s employment income. They did not, however, include the husband’s $1,165 monthly Social Security income. The debtors proposed a bankruptcy plan that would eventually pay $14,700 on their $180,500 debt. Walsh, slip op. at 4-5. Continue reading