April 1, 2013 Bankruptcy Dollar Adjustments: What to Expect

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The bankruptcy code at 11 USC 104 provides for the periodic adjustments of certain dollar figures in the bankruptcy code every 3 years to account for inflation. The next set of new figures will be effective April 1, 2013. Closer to that date, the courts will publish an official list of changes. However, the Consumer Price Index data needed for the adjustment is now available, so it is possible to predict what these adjustments will be.

Based on my review of the CPI data, I believe the inflator value of 1.063 will be applicable to the Section 104 calculations. This is somewhat more modest then the 1.070 inflator of 2010 and 1.095 inflator of 2007, but is to be expected given the economic conditions of late.

Once an inflator is determined, the dollar adjustments can be calculated. I'll start by discussing a few that I believe are particularly relevant, and then at the end include a table of predicted changes. While a 6.3% increase is not particularly large, the numbers to be adjusted are occasionally very consequential in bankruptcy cases. Debtors on the margin might find a small change very significant.

Please note that the numbers in this post are the product of one attorney's predicted calculation, and should not be used in place of the official numbers, which will be released in coming weeks.

1. Chapter 13 Debt Limit Increases

Section 109(e) of the bankruptcy code limits the eligibility of people to file chapter 13 bankruptcy based on amount of debt. Based on the predicted inflation value, the limit on noncontingent liquidated unsecured debt would increase from $360,475 to $383,175, and the limit on noncontingent liquidated secured debt would increase from $1,081,400 to $1,149,525. The debt limits come up with some frequency, and at times are a harsh cut-off from cost-effective reorganization under chapter 13.

2. Means Testing Thresholds

The means test controls chapter 7 eligibility by providing a grounds to dismiss chapter 7 cases that fail the test and are "presumed abusive." In chapter 7, a case is "presumed abusive" if, after applying statutorily allowed deductions, too much income remains. Whether or not the income after deductions is too much is determined by comparison to two statutory thresholds, both of which are scheduled to be increased by the April 1 adjustments.

Based on my calculations, one threshold would increase from $11,725 to $12,475 and the other from $7,025 to $7,425. For debtors with at least $50,000 in unsecured debt, this amounts to a increase in $12.50 per month in income that would not trigger means testing eligibility issues. Practically speaking, such a fairly modest change and not any more consequential than the semi-annual means testing adjustments.

The means test only applies if a debtor is above the median income for his or her household size. While household sizes of 1 to 4 use actual statistical data, households "medians" for household sizes of 5 and more are calculated by adding a statutory amount to the UST published statistic for a household of four. This monthly statutory figure is likely to increase from $625 to $675. The consequence is that annual medians for households of 5 would increase by $600; households of 6 by $1,200, households of 7 by $1,800, and so forth.

3. Bankruptcy Code Exemptions

Section 522(d) creates the so-called "federal exemptions" which certain debtors claim to protect their assets in bankruptcy. Some states allow their residents to choose the federal exemptions, while others, including North Carolina, do not. Most NC residents will use the NC statutory exemptions, not the 522(d) federal exemptions. The exception is certain cases where the debtor has moved to North Carolina from particular states within the two years prior to filing the bankruptcy case.

Many of the 522(d) federal exemptions are limited to a certain dollar amount of property. Each of these limits will increase on April 1, 2013 with the inflation adjustment. Applying my 6.3% estimate, changes would include an increase in the homestead exemption from $21,625 to $22,975 and the motor vehicle exemption from $3,450 to $3,675, for example (see also full table below).

4. Fraudulent Debt Presumptions

If a creditor proves a particular debt was obtained by false pretenses or fraud in a dischargability adversary proceeding, the debt is not discharged and survives the bankruptcy. The creditor has an easier case when one of two situations exist and fraud is presumed: (1) purchases of luxury goods totaling more than $600 in the 90 days prior to bankruptcy and (2) certain cash advances totaling $875 in the 70 days prior to bankruptcy. Both of these figures will be adjusted, to $650 and $925 respectively based on my predictions.

Full Table

The below table reflects my calculations based on Section 104 and a predicted 1.063 inflator:

2010 Predicted 2013
Section 101(3) - definition of assisted person $175,750 $186,825
Section 101(18) - definition of family farmer $3,792,650 $4,031,575
101(19A) - definition of family fisherman $1,757,475 $1,868,200
101(51D) - definition of small business debtor $2,343,300 $2,490,925
Section 109(e) - allowable debt limits for individual filing bankruptcy under chapter 13 $360,475 $383,175
$1,081,400 $1,149,525
Section 303(b) - minimum aggregate claims needed for the commencement of involuntary chapter 7 or chapter 11 bankruptcy
(1) - in paragraph (1) $14,425 $15,325
(2) - in paragraph (2) $14,425 $15,325
Section 507(a) - priority expenses and claims
(1) - in paragraph (4) $11,725 $12,475
(2) - in paragraph (5) $11,725 $12,475
(3) - in paragraph (6) $5,775 $6,150
(4) - in paragraph (7) $2,600 $2,775
Section 522(d) - value of property exemptions allowed to the debtor
(1) - in paragraph (1) $21,625 $22,975
(2) - in paragraph (2) $3,450 $3,675
(3) - in paragraph (3) $550 $575
$11,525 $12,250
(4) - in paragraph (4) $1,450 $1,550
(5) - in paragraph (5) $1,150 $1,225
$10,825 $11,500
(6) - in paragraph (6) $2,175 $2,300
(7) - in paragraph (8) $11,525 $12,250
(8) - in paragraph (11)(D) $21,625 $22,975
522(f)(3) - exception to lien avoidance under certain state laws $5,850 $6,225
522(f)(4)- items excluded from definition of household goods for lien avoidance purposes $600 $650
522(n) - maximum aggregate value of assets in individual retirement accounts exempted $1,171,650 $1,245,475
522(p) - qualified homestead exemption $146,450 $155,675
522(q) - state homestead exemption $146,450 $155,675
523(a)(2)(C) - exceptions to discharge
in subclause (i)(I) - consumer debts, incurred $600 $650
in subclause (i)(II) - cash advances incurred $875 $925
541(b)- property of the estate exclusions
(1) - in paragraph (5)(C) - education IRA funds in the aggregate $5,850 $6,225
(2) - in paragraph (6)(C) - pre- purchased tuition credits in the aggregate $5,850 $6,225
547(c)(9) - preferences, trustee may not avoid a transfer if, in a case filed by a debtor whose debts are not primarily consumer debts, the aggregate value of property is less than $5,850 $6,225
707(b) - dismissal of a case or conversion to a case under chapter 11 or 13 (means test)
(1) - in paragraph (2)(A)(i)(I) $7,025 $7,475
(2) - in paragraph (2)(A)(i)(II) $11,725 $12,475
(3) - in paragraph (2)(A)(ii)(IV) $1,775 $1,875
(4) - in paragraph (2)(B)(iv)(I) $7,025 $7,475
(5) - in paragraph (2)(B)(iv)(II) $11,725 $12,475
(6) - in paragraph (5)(B) $1,175 $1,250
(7) - in paragraph 6(C) $625 $675
(8) - in paragraph 7(A) $625 $675
1322(d) - contents of chapter 13 plan, monthly income $625 $675
1325(b) - chapter 13 confirmation of plan, disposable income $625 $675
1326(b)(3) - payments to former chapter 7 trustee $25 $25
28 USC 1409(b) - a trustee may commence a proceeding arising in or related to a case to recover
(1) - money judgment of or property worth less than $1,175 $1,250
(2) - a consumer debt less than $17,575 $18,675
(3) - a non consumer debt against a non insider less than $11,725 $12,475

Update 2/21/2013: The official numbers have been posted to the federal register, and are as predicted in this post.

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Knightdale Attorney Erich Fabricius represents clients in bankruptcy, consumer debt litigation, and in small business matters. He is licensed to practice law in North Carolina. His blog posts consider matters related to debt, bankruptcy, litigation, and other legal issues in North Carolina.

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This blog post is made available for educational and informational purposes only and to promote a general understanding of the law, and not to provide specific legal advice. Use of this blog does not create an attorney-client relationship. Reading this post is not a substitute for obtaining legal advice based on the unique facts of your situation from an attorney licensed to practice law in your state. No representation is made regarding the currentness of the information contained in this post. Examples that may be provided in this post are merely for illustrative purposes; the results in your case may be different and no results are guaranteed.