Understanding how to manage an sba loan in bankruptcy is crucial for business owners facing financial difficulties.

Many people are unsure if they can discharge an sba loan in bankruptcy, and it’s important to know your options.

The implications of an sba loan in bankruptcy can vary based on the type of loan and the circumstances surrounding it.

Here’s the short answer: yes, SBA loans can be discharged in bankruptcy. But there’s a longer answer you need to hear before you decide what to do because personal guarantees, non-dischargeability exceptions, and what happens to your business make this more complicated than a simple YES or NO.

Understanding the terms of your sba loan in bankruptcy is vital to making informed decisions.

I’ve helped a lot of people work through exactly this situation. Let me break it down.

What Kind of SBA Loan Do You Have?

Not all SBA loans are the same, and the type matters.

Standard SBA 7(a) loans are the most common and are used for working capital, equipment, or business acquisition. These are made through private lenders and guaranteed by the SBA up to 85%.

SBA 504 loans fund major fixed assets like commercial real estate. They involve a private lender plus a Certified Development Company.

EIDL loans (Economic Injury Disaster Loans) are direct loans from the SBA, not through a bank. A lot of small business owners took these out during COVID. The rules for personal guarantees on EIDL are different depending on the loan amount.

When considering how to handle an sba loan in bankruptcy, it’s essential to evaluate your financial situation thoroughly.

Many borrowers find themselves asking, can I discharge my sba loan in bankruptcy, and the answer may depend on various factors.

It’s crucial to know the risks associated with your sba loan in bankruptcy, especially regarding potential fraud claims.

For those facing difficulties, understanding the process of discharging an sba loan in bankruptcy can relieve some stress.

Why does it matter? Because the structure of the loan (who you borrowed from, what collateral you pledged, whether you signed a personal guarantee) shapes what happens in bankruptcy.

In cases of willful misconduct, the outcome of an sba loan in bankruptcy can be significantly affected.

Considerations for Discharging an SBA Loan in Bankruptcy

Understanding fiduciary misconduct related to an sba loan in bankruptcy can help avoid complications.

The general rule: SBA loans are unsecured or partially secured debt. In a Chapter 7 bankruptcy, dischargeable unsecured debt gets wiped out. Your personal obligation to repay it disappears.

But there are exceptions. Section 523 of the Bankruptcy Code lists debts that survive bankruptcy regardless of what chapter you file. Here are the dischargeability exceptions most relevant to SBA borrowers:

The personal guarantee on an sba loan in bankruptcy can complicate your ability to discharge the debt.

When you file for bankruptcy, the personal guarantee associated with an sba loan in bankruptcy may become a pivotal issue.

Fraud and Misrepresentation

If you obtained the loan through false pretenses (overstating revenue, falsifying financial records, misrepresenting how you’d use the funds) then the SBA or lender can file an adversary proceeding to have the debt declared non-dischargeable. The risk here isn’t trivial. The SBA reviews loan applications carefully when borrowers file for bankruptcy, and discrepancies get flagged.

That said, most SBA borrowers didn’t commit fraud. They just ran businesses that failed. Honest business failure is not fraud.

Willful and Malicious Injury

This one is less common in the SBA context, but it can come up if you dissipated collateral or sold off business assets that secured the loan, for example, without the lender’s consent.

Filing for bankruptcy can offer relief from the obligations of an sba loan in bankruptcy, depending on your situation.

Fiduciary Misconduct

Understanding what happens when facing an sba loan in bankruptcy can help you better prepare for the process.

The implications of an sba loan in bankruptcy extend beyond just the debt itself; they can affect your entire financial future.

If you were operating in a fiduciary capacity and misapplied funds, that debt can be non-dischargeable. Again, this is uncommon for typical SBA borrowers, but worth knowing.

The takeaway: for most people who took out SBA loans in good faith, ran into trouble, and are now looking at bankruptcy, non-dischargeability is not the biggest concern. The personal guarantee usually is.

If you’re facing litigation regarding an sba loan in bankruptcy, understanding your rights is crucial.

The Personal Guarantee Problem

Timing plays a significant role when dealing with an sba loan in bankruptcy and its related legal procedures.

Almost every SBA loan over $25,000 requires a personal guarantee. For EIDL loans, the threshold was $200,000 during COVID. If you’re above those numbers, you signed a guarantee. That means you’re on the hook personally, not just your business.

Here’s what the personal guarantee means in practice:

Bankruptcy can provide a reset for your financial obligations, including your sba loan in bankruptcy.

Exploring your options when dealing with an sba loan in bankruptcy is important to avoid unnecessary complications.

• The SBA or lender can sue you personally if the business defaults.
• They can get a judgment against you individually.
• They can garnish your wages, levy your bank accounts, or place liens on your home.

Bankruptcy changes this. When you file for personal bankruptcy, either Chapter 7 or Chapter 13, the automatic stay kicks in immediately and all collection activity stops. If you receive a discharge, your personal liability under the guarantee is eliminated.

The business’s debt to the lender doesn’t go away. The lender can still pursue the business. But your personal exposure will be discharged in your personal bankruptcy.

SBA loan in bankruptcy situations often require careful navigation to ensure your rights are protected.

What Happens When the SBA Sues You

You got the default notice. Maybe you’ve been ignoring calls. Now you may be facing a lawsuit, either from the SBA directly, or from the lender, or both. A few things to know:

The SBA Refers Cases to the Department of Justice

When an SBA direct loan defaults (like an EIDL), the SBA can refer the account to the U.S. Department of Justice for collection. The DOJ can sue you in federal court and has broader and more powerful collection tools than a typical private creditor.

Private Lender Lawsuits

For SBA 7(a) loans, the private lender typically pursues you. After paying their claim to the SBA (using the SBA guarantee), the lender is entitled to collect the unguaranteed portion from you. The SBA may separately seek recovery on the guaranteed portion.

Timing and the Bankruptcy Filing

Understanding the implications of an sba loan in bankruptcy can help you make informed decisions about your financial future.

When filing for personal bankruptcy, knowing how an sba loan in bankruptcy affects your assets is crucial.

Filing for bankruptcy once you’re already being sued stops the lawsuit cold. The automatic stay halts pending litigation against you personally. If a judgment has already been entered, bankruptcy can still discharge the underlying debt, however judgment liens on real property require additional steps to address.

Don’t wait until a judgment is entered to call an attorney. Once a lien attaches to your home, your options narrow.

In a Chapter 7 case, your sba loan in bankruptcy may lead to liquidation of assets if not carefully managed.

Do You Need to File Business Bankruptcy, Too?

This is one of the most common questions I get: do I need to file for my business at the same time I file personally?

Reorganizing your debts, including an sba loan in bankruptcy, can lead to more favorable outcomes for business owners.

The short answer: usually no. Here’s why.

Understanding the consequences of an sba loan in bankruptcy will prepare you for what lies ahead.

If your business is a sole proprietorship, there’s no legal distinction between you and the business. A personal bankruptcy covers both.

If your business is an LLC or corporation, it’s a separate legal entity. Your personal bankruptcy discharge eliminates your personal liability, but it does not discharge the business’s debts. The lender can still pursue the business entity.

But here’s the practical reality: if the business has failed or is failing, there often isn’t much left for the lender to pursue. A lender suing a defunct LLC with no assets gets nothing. The personal bankruptcy is what actually protects you from collection efforts.

A simultaneous business bankruptcy might make sense if:

• The business has significant assets that need to be administered in an orderly way.
• The business has ongoing operations you want to restructure (Chapter 11 territory).
• There are other creditors beyond the SBA (employees, vendors, commercial landlords) with claims that need to be addressed in a coordinated way.
• You’re trying to sell the business as a going concern and want the protection of the automatic stay while you finalize the sale.

For most small business owners in default on an SBA loan with a failed or failing business, a personal bankruptcy without a simultaneous business filing is the right approach. We can talk through your specific situation.

What Happens to Your Business When You File for Personal Bankruptcy?

This depends on the structure of your business and what chapter you file.

Chapter 7 Liquidation

In a Chapter 7, the bankruptcy trustee takes control of your non-exempt assets and liquidates them to pay creditors. Your ownership interest in a business is an asset. If the business has value, the trustee can sell your interest or sell the entire business.

If the business is a defunct LLC with no assets, the trustee typically abandons the interest as valueless. If the business is an operating business with equity, then the trustee could sell your ownership stake or liquidate the entire business.

There are ways to address this. Exemptions in DC, Maryland, and Virginia vary. And if the business’s value is modest, the trustee may not bother. But this is a real consideration, and one we work through carefully before recommending Chapter 7 for a business owner.

Chapter 13 Reorganization

Your experience with an sba loan in bankruptcy should guide your decisions and actions moving forward.

In Chapter 13, you keep your assets and pay back a portion of your debts over three to five years. Your business interest is protected. The SBA loan (or the unsecured portion of it) gets lumped in with other unsecured debt and paid a fraction on the dollar through the plan. In many cases, creditors receive nothing.

Chapter 13 is often the better fit for business owners who want to keep an operating business, have non-exempt assets they want to protect, or have income above the Chapter 7 means test threshold.

When Bankruptcy Won’t Help: What Happens When the SBA Objects to Discharge

Not every SBA bankruptcy story ends with a clean discharge. And if you made misstatements on your application — intentionally or not — the SBA or lender can file an adversary proceeding to prevent the debt from being discharged.

This is where the stakes get real.

A Real Case: Undisclosed Litigation

A business owner with decades of experience applied for an EIDL during the pandemic. She was also involved in ongoing probate litigation at the time. She did not disclose the litigation on the loan application.

Years later, she filed for bankruptcy and sought to discharge the EIDL.

The SBA filed an adversary proceeding under Section 523(a)(2)(B), alleging fraud. They argued she had made a materially false statement about her financial condition by omitting the probate case.

In a July 3, 2025 Memorandum Decision (Case No. 23-03043, Bankr. N.D. Cal.), the bankruptcy court found against her. The pending litigation was a contingent liability that should have been disclosed. The fact that she personally believed the probate case was unwinnable didn’t matter. The loan application didn’t ask her opinion. It asked for facts.

The court called her testimony on the subject “beyond credulity.” Someone with her business experience should have known better. The court’s language was brutal: a businesswoman with decades of experience should have known better.

The EIDL debt was declared non-dischargeable. She still owes it.

If you’ve been running a business for years, the court won’t let ignorance be your defense.

What This Teaches

This debtor didn’t intentionally commit fraud. She just thought the litigation was immaterial. She made a judgment call and got it wrong. Unfortunately, Section 523(a)(2)(B) doesn’t care about intent. It cares about whether the statement was materially false and whether the lender relied on it.

Missing a line item on a loan application. A liability you thought was worthless. A detail you didn’t think mattered. Any of these can be enough for the DOJ to sue you.

Why This Matters to You

Understanding how to handle an sba loan in bankruptcy can empower you to take control of your finances.

The horror story above isn’t about a criminal prosecution (though that can happen too). It’s about an adversary proceeding, or a mini-lawsuit within your bankruptcy case filed by the SBA or lender seeking to make that specific debt non-dischargeable.

Here’s what the law requires them to prove under 11 U.S.C. § 523(a)(2)(B):

1. You made a written statement (your loan application) concerning your financial condition.
2. That statement was materially false, meaning it made a real difference to the lender’s decision.
3. The lender reasonably relied on it.
4. You caused the statement to be made with intent to deceive.

You might think that intent to deceive is the hard part to prove, but it’s actually not. Court focus instead on the falsity of the statement and the lender’s reliance. If the numbers don’t line up, that’s often enough.

This is why you should hire an experienced bankruptcy attorney before you file. Not after you’ve filed and the SBA has objected. Before. Lee Legal can review your application against your actual records, spot problems, and help you decide whether bankruptcy is the right move, or whether negotiating an Offer in Compromise with the SBA makes more sense.

Other Questions Clients Usually Ask

Will bankruptcy affect my ability to get SBA loans in the future?

Yes, for a period of time. The SBA has restrictions on extending credit to people who have previously defaulted on government-backed debt. A discharge in bankruptcy doesn’t automatically restore your eligibility. How long the bar lasts depends on the program. If future SBA borrowing matters to you, that’s a factor worth discussing.

What about collateral: my home, equipment, accounts receivable?

If the SBA loan was secured by specific collateral, the lien survives bankruptcy unless it’s stripped or surrendered. A Chapter 7 discharge eliminates your personal obligation to pay, but a secured creditor can still foreclose on the collateral. If your home is collateral on the SBA loan, that’s a significant issue we need to work through before you file.

My business partner also signed. What happens to them?

Your bankruptcy only covers you. Your business partner’s personal liability is unaffected by your filing. If they also signed a personal guarantee, your partner will remain fully exposed. This is a real tension point in partnerships, and it’s worth thinking through how a filing by one partner affects the other. In some cases, coordinated filings make sense.

Can I negotiate with the SBA instead of filing?

Yes. The SBA has an Offer in Compromise (OIC) program that allows borrowers to settle defaulted loans for less than the full balance. The SBA doesn’t make it easy, and they have strict eligibility requirements. The process is also slooow. But an OIC is a viable alternative to bankruptcy for some people. Whether it makes more sense than bankruptcy depends on your overall debt picture, your income, and your assets.

I already have a judgment against me. Is it too late?

Not necessarily. Bankruptcy can still discharge the underlying debt even after a judgment. But if the judgment creditor has recorded a lien against your real property, that lien doesn’t automatically go away. You may need a motion to avoid the lien as part of the bankruptcy process. The sooner you act, the more options you have.

The Bottom Line

SBA loans are dischargeable. Personal guarantees on SBA loans are dischargeable. If you’ve been living in fear of what the SBA or your lender can do to you, bankruptcy may be the exit ramp you’ve been looking for.

What it takes to get there, that’s what we figure out together. I’ve been doing this a long time. Give me a call and let’s talk through your situation.

What are non-qualified student loans?

Student loans are generally excepted from the bankruptcy discharge in 11 U.S.C. 523(a)(8). That section of the Bankruptcy Code prevents discharge of four distinct categories of educational loans:

1. Loans made, insured, or guaranteed by a governmental unit;
2. Loans fully or partially funded by a governmental unit or nonprofit institution;
3. Obligations to repay funds as an educational benefit, scholarship, or stipend; and
4. Any “qualified educational loan” as defined by Section 221(d)(1) of the Internal Revenue Code (“IRC”) of 1986.

The final category is the one we’re examining here. A “qualified educational loan” as defined by IRC 221(d)(1) is “any indebtedness incurred . . . solely to pay qualified higher education expenses.”

So in order to be a “qualified education loan,” the debt must be solely made for qualified higher education expenses. Thus, if a private student loan is partially outside the cost of attendance to a particular educational institution, then the entire loan is non-qualified and can be discharged. The IRC defines “cost of attendance” as “tuition, books and a reasonable allowance for room and board.” Loans made in excess of certified federal limits can be discharged in bankruptcy.

Make your case

Non-qualified private student loans made in excess of the “cost of attendance” are dischargeable. But you must file an adversary proceeding in your Chapter 7 bankruptcy to request that the court find those loans dischargeable.

Courts narrowly construe exceptions to discharge against creditors. So the student lender must (and will) fight your adversary proceeding and prove its case or your loan will be discharged in your Chapter 7.

You will need to meticulously document and calculate your loan amounts and for what purposes you used the funds. You will also need to research the cost of attendance figures for the institution(s) you attended. Student lenders do not just roll over in these cases, so you must be prepared to make your case.

According to a recent Pew Research study, less than half of Americans (46 percent) make more than they spend. Many people don’t even know the actual amount of their debt. Debt can be intimidating, which in turn causes some to simply ignore it.

Face your debt and assess your options

At times, life can present a situation that forces one to confront their finances, upfront and head-on. Regardless of the type of debt you have and the amount, paying it off can take years, if not decades. Of course, there are measures you can take in effort to achieve this goal, but bankruptcy is the quickest and least expensive way to alleviate your debt. Period.

Bankruptcy eliminates most types of debt, stops collections, and allows you to reorganize and catch up on missed car or mortgage payments. Chapter 7 bankruptcy is a good option for those that do not have the ability to pay all their debts, while a Chapter 13 is a reorganization bankruptcy for those that have the income to catch up over time. Bankruptcy is much less expensive than debt settlement.

A bankruptcy filing will be on your credit report and may initially lower your score, and that is a cost, too. But you can immediately begin to rebuild your credit following bankruptcy. This is the time to add new credit, like a secured credit card or small installment loan. Go forward making on-time payments ALWAYS for all debt, the old and the new. Not exceeding 30 percent utilization of your credit cards is also a good habit to practice.

Get rid of debt — and keep it that way!

If you continue moving forward with good financial habits, you can get rid of debt, rebuild your credit — and keep it that way! Consult a bankruptcy attorney to learn your options. Each bankruptcy case is different, relative to the person filing, so what may be true for one person may not be the case for another. But between allowing debt to continuously accumulate with no resolution versus allowing bankruptcy to give you a fresh start, the latter is the better option every time.

Make becoming debt-free your New Year resolution

This year can be different. Instead of giving away your whole paycheck to pay debts, you could invest in yourself and your future. Instead of avoiding your creditors or making excuses, you could get rid of your debt and tell your creditors to take a hike.

Now is the time to reassess your goals and reevaluate your present ability to reach those goals. If hard work and perseverance can get you to your goals, then work hard and persevere. But if you need to take another route, keep an open mind and seek an honest appraisal of your circumstances.

Get rid of your debt with bankruptcy

You may qualify for a Chapter 7 bankruptcy, which allows you to quickly and easily discharge your creditors. That means within three months, you could be completely debt-free.

If you make too much income for Chapter 7, consider instead Chapter 13 bankruptcy. Oftentimes, we will be able to propose a repayment plan that discharges a majority of your debt.

The holidays are over. A new year has begun. Make this the year you get rid of your debt.

What is the Chapter 7 means test?

Chapter 7 bankruptcy allows you to quickly and easily discharge your unsecured debts. To qualify for a Chapter 7 bankruptcy, you must pass the means test. The means test compares your current monthly income to the median income for your jurisdiction. Generally speaking, the lower your monthly disposable income, the more likely it is that you will qualify for Chapter 7 bankruptcy.

District of Columbia means test numbers

A single-person household in DC now qualifies for Chapter 7 with $64,324 in annual income, which represents an $8,994 (16 percent) increase from November 2017. A four-person household saw the largest year-over-year increase at 21 percent; a four-person household making $129,135 or less now qualifies for Chapter 7 bankruptcy.

The local housing allowance for utilities also increased 6 percent year over year, to $579 for a one-person household and to $799 for a four-person household.

Virginia means test numbers

All means test numbers in Virginia increased year-over-year. Single-person households qualify with $60,389 (an increase of 3 percent), two-person households with $76,047 (5 percent), and three-person households with $89,593 (5 percent). A four-person household in Virginia saw the smallest increase (1 percent) at $102,751 median income.

Local housing utility allowances for Fairfax and Loudoun counties both increased 6 percent. But Fairfax mortgage allowances remained flat while Loudoun’s decreased by 2 percent. And while mortgage allowances in Prince William County decreased 1 percent, utility allowances increased 5 percent across all household sizes. Meanwhile, Alexandria allowances increased for both utilities (a whopping 7 percent) and mortgages (1 percent).

Maryland means test numbers

Means test numbers for 1-person ($64,615), 2-person ($84,731), and 4-person ($115,771) households remained mostly flat in Maryland. Three-person household means test numbers, however, increased seven percent (or $6,812) to a median income of $102,917.

The local housing allowance for most counties remained mostly unchanged. But the median utility allowances for both Montgomery and Prince George’s counties increased 4 percent, while mortgage allowances decreased 1 percent. Interestingly, in Prince George’s County, vehicle operating expenses decreased 10 percent year-over-year for both one-car and two-car households.

Chapter 7 bankruptcy

How long your Chapter 7 bankruptcy will take depends upon whether you have assets to distribute. Most Chapter 7 cases are completed quite quickly. But if you have unexempt assets, your Chapter 7 case could have a more extended timeline. Asset cases take longer. If the trustee must liquidate assets and distribute proceeds to creditors, that takes time. Your attorney should advise you before you even file whether you have an asset or no-asset case.

If all of your property is fully protected by exemption, then you will have a no-asset case. No asset cases take three months, start to finish, from filing to discharge. Other types of actions, like adversary proceedings, can delay the closure of a Chapter 7. But the vast majority of Chapter 7 bankruptcies close about 90 days after filing.

Chapter 13 bankruptcy

Chapter 13 bankruptcy allows you to propose a repayment plan that lasts from three to five years. Your household income and type of debt determine whether you have a three-year (36 months) or five-year (60 months) repayment plan. If you want to make up missed payments on a secured debt, like a home mortgage, then usually you will want to file a five-year plan.

And at the end of your plan, all remaining balances on your debts will be discharged. Chapter 13 bankruptcy is available to almost every consumer debtor, but you must have steady monthly income to qualify.

Chapter 11 bankruptcy

Individual debtors may also use Chapter 11 of the bankruptcy code. Typically, Chapter 11 bankruptcy is reserved for high earners or those with multiple real estate or business assets. If you are able to “pre-package” your case, then the process may be over in a matter of weeks. Other Chapter 11 reorganization plans last two years, five years, or even longer. Chapter 11 offers flexibility but comes with costs, too. Most consumer debtors are better served by Chapter 7 or Chapter 13.

How long does bankruptcy take?

Chapter 7 usually takes three months, start to finish. Chapter 13 takes between three and five years. And Chapter 11 can be over very quickly or take more than five years.

If timing is a concern for you, be sure to ask your attorney about your expected timeline before you even file. Note that for most credit reporting, the date of the bankruptcy filing (and not the discharge date or date of case closure) is the most important date in your case.

Your financial freedom of choice may be limited while you remain in an active bankruptcy. If you have concerns about how long your bankruptcy will take, discuss them with your attorney from the outset so he can plan your case appropriately.

You owe taxes from previous years

If you owe taxes for previous years, the IRS will automatically apply your refund against the taxes you owe. You will receive a notice of intent to levy in the mail. If your refund is larger than your total tax liability, then you will receive a refund for the amount of the difference.

You haven’t filed all of your returns

If you haven’t filed returns for a previous year, the IRS may keep your tax refund until you file those returns. You may not owe anything once you file any missing returns, in which case you will get your refund once the returns are processed. But if you do owe taxes for the unfiled years, see above: the IRS will automatically apply your refund against your outstanding liability.

You are delinquent on student loans

The U.S. student loan situation is a big hot mess. The current student loan delinquency rate is 11.2 percent. The Treasury Offset Program will seize your tax refund to pay down your student loans if you are in serious default. If you want to keep your tax refund, consider entering into an income-based repayment program prior to filing your return.

You owe back child support

The Treasury Offset Program can also seize your tax refund to pay off back child support. If you are seriously delinquent, the IRS may keep your tax refund to offset the delinquency. If your refund is larger than the back child support, then you are entitled to the difference. But you may need to contact child support services to obtain the balance of your refund. Do this as soon as you receive the notice of intent to offset.

You missed the filing deadline

If you don’t file a tax return for a year in which you’re due a refund, you can file the return within three years and still receive the refund. After that, you’re out of luck, because there’e a statute of limitations on tax refunds. In short, if you wait too long (three years) to file your return then you permanently lose your ability to claim a refund from that return year.

Your refund is going to the bankruptcy trustee

In a Chapter 7 bankruptcy, your attorney will in most cases be able to fully protect your tax refund. If you are in a Chapter 13 percentage repayment plan, however, you will likely have to cough up your refunds to the Chapter 13 trustee. That’s why it’s important to reduce your exemptions so that you’re not overpaying your taxes each year.

Student loans are not dischargeable in bankruptcy

Lots of different types of debts are not dischargeable in bankruptcy. You cannot discharge domestic support obligations — child support, property division, or alimony. Likewise, you cannot discharge fines, forfeitures, and criminal restitution obligations; debts arising from fraud or theft; or certain debts that you fail to schedule in your bankruptcy. But of course none of these types of debts are loans.

Most tax debts cannot be discharged in Chapter 7, but some can. Again, however, tax debts are not loans.

Student loans are unique in that public and private lenders are completely protected from the bankruptcy discharge. In the U.S. the only type of risk-free lending is student loans.

All lenders face risk — except student loan lenders

Unsecured creditors, including credit card issuers and personal loan lenders, invariably face the risk of default. Hospitals and clinics face the risk of nonpayment when they treat a patient without payment up-front. The debt collection process is expensive. Creditors often charge off debts that they deem too difficult to collect. Unsecured creditors face immense risk that their loans will be discharged in bankruptcy, or that they simply will never be able to collect.

Secured creditors like auto lenders and mortgage companies face lesser risk, but they face risk nonetheless. Most secured debt is, in fact, undersecured. That is, the collateral is more valuable to the borrower than it is to the creditor. Few creditors would choose to repossess, seize, or foreclosure rather than be paid per the terms of the security agreement. Even if the secured creditor does liquidate the property, the odds of recovering its loan in full are, in most cases, very low.

Student loans do not face such risk. If you take out a student loan, you will owe that loan until you pay it off or until you die. And even if you die, your student loan may still need to be paid from your estate. While federal student loans are cancelled upon the death of the borrower, private student loans are not.

Bring back the bankruptcy discharge for student loans

Betsy DeVos, Secretary of the Department of Education, is sending mixed messages. On the one hand, there are indications that Education is considering clarifying the meaning of undue hardship for the discharge of student loans. That is welcome news. Lee Legal has long advocated for the return of the student loan bankruptcy discharge. On the other hand, however, the DOE is arguing that the nation’s student loan servicers should be protected from state rules that may be far tougher than federal law.

No for-profit institution should be able to engage in risk-free lending. And the federal government shouldn’t make a profit by lending to student taxpayers. Student lenders should face the same risk of lending as all other creditors.

An income tax refund received after a bankruptcy is filed is subject to turnover. Doan v. Hudgins, 672 F.2d 831, 833 (11th Cir. 1982). The trustee will seek to seize your tax refund and distribute the proceeds to your creditors. You must proactively protect your tax refund in bankruptcy.

Chapter 7 vs. Chapter 13

Tax refunds as assets in Chapter 7 are always subject to liquidation. But cases filed later in the year, or right before tax season, see more tax refund turnovers. Again, if you can exempt your tax refund, then the trustee will have no interest in liquidating it for distribution to creditors.

In Chapter 13, however, if you propose a 100 percent repayment plan, then your tax refunds are yours to keep. Chapter 13 percentage plan cases often result in tax refund turnover to the trustee. You will want to discuss with your attorney how best to adjust your withholdings to minimize the amount of tax overpayment you make each year.

How to protect your tax refund in bankruptcy

The exemption laws applicable to your jurisdiction determine how much of your tax refund you can protect. Virginia and Maryland bankruptcy filers must use the state exemptions. Washington, D.C. filers may use either the state or federal exemptions.

Many people rely on their tax refunds to tune up their cars, fix the roof, pay tuition, shore up emergency savings, or even to take a badly-needed vacation. If you want to protect your tax refund in bankruptcy, let your attorney advise you how best to do so.

Most of our clients feel their credit card purchases to be investments. From clothing and food and appliances to rental cars and educational expenses, most people use plastic to purchase with the intent of repayment.

Overextension of credit is where most people run into trouble. At that point you may want to talk to a bankruptcy attorney. Lee Legal serves D.C., Maryland, and Northern Virginia.

Breaking the debt cycle

Once you realize that you cannot reasonably ever repay all of your creditors, consider bankruptcy. If you have assets or income to protect, Chapter 13 requires creditors to conform to a plan proposed by you. If you have few valuable assets or income insufficient to meet your obligations, Chapter 7 can wipe the slate clean and let you start over.

Before you send away good money after bad, talk to a bankruptcy lawyer. We help our clients break the cycle of debt.

Stop paying the credit cards

Once you know you qualify for a Chapter 7 bankruptcy, then you can stop paying credit card bills. You can’t rack up charges or use them other than necessities before filing. But you won’t need to send most creditors another penny.

If you qualify for a Chapter 13 bankruptcy, stop paying the monthly amounts and start your bankruptcy. If you know you have to file, don’t procrastinate.

This applies to many other types of debts, too. You can stop paying old utility and medical bills, lines of credit, and personal loans. All of these debts will be discharged in your bankruptcy.

Don’t send good money after bad

Another way to explain it is by the so-called “sunk cost fallacy.” A sunk cost is money already invested. The more you invest, the more difficult those sunk costs are to abandon. Yet rational decisions should be made on future value. Knowing when you’re sending good money after bad isn’t really so easy. We often have emotional attachments to our investments.

Miscalculation is often difficult to admit. Once you realize you’re overextended financially, the sooner you correct course, the better.

Here are the new Chapter 7 means test numbers for the Washington, D.C. region:

Note that the median incomes for 2-person, 3-person, and 4-person households in D.C. are exactly the same. I have previously noted that the D.C. means test numbers are patently unjust. The U.S. Trustee’s Office states that the Chapter 7 means test numbers are based on U.S. Bureau of Census data.

New Chapter 7 means test numbers: Analysis

The previous means test numbers, applicable to cases filed from May 1, 2017 to October 31, 2017, are no longer operative. All three jurisdictions in the D.C. area have apparently experienced an increase in income.

The means test numbers for Washington, D.C. saw an aggregate income increase of $13,144, or 3.6 percent. Maryland increased $10,139 (2.9 percent), while Virginia aggregate income increase $9,638 (3.1 percent).

The biggest changes in the new Chapter 7 means test numbers were for 2-person and 3-person households in the District, which saw an $8,051 increase. The smallest change in the new numbers was for a single-person household in Maryland, which increased just $951.

How do the new Chapter 7 means test numbers affect you?

For some households, the ability to pass the means test may change from month to month. For other households, the means test represents an absolute bar to filing under Chapter 7. Talk to an experienced bankruptcy attorney to determine whether you qualify for a Chapter 7 bankruptcy.

Bankruptcy exemptions

Your home state’s bankruptcy exemptions determine how much of your property you can protect. Bankruptcy exemptions allow you to keep sum-certain dollar amounts of assets in bankruptcy. In most cases, you can fully protect the following assets:

• Motor vehicles
• Household goods, furnishings, and clothing
• Most retirement accounts, pensions, 401(k)s, and profit-sharing plans
• Social Security payments

In Washington, D.C., you can also protect all of the equity in your primary residence. But the Virginia and Maryland homestead laws allow much lower levels of home equity protection.

The Chapter 7 trustee may also allow you to negotiate the buy-back of your nonexempt property. Your bankruptcy attorney will apprise you of your options if this is possible.

Bankruptcy planning and asset protection

You may also be able to use several asset conversion strategies to avail yourself of the full statutory exemptions. Certain amounts of nonexempt liquid assets may be used to:

• Purchase a car, household goods, clothes, or other necessities
• Make contributions to your exempt retirement accounts
• Pay down your mortgage
• Take out a life insurance policy
• Pay off nondischargeable debts, like taxes, student loans, or delinquent child support

Advanced bankruptcy planning

Asset protection trusts, equity reduction, and accounts-receivable financing are just a few of several less common techniques for protecting assets in bankruptcy.

Asset protection trusts. Several states now offer asset protection trusts, and you need not be a resident to have one. An independent trustee must run the trust and control all distributions. And the trust must contain irrevocability and spendthrift clauses.

Equity reduction. You may be able to reduce the equity in an asset (usually real property) by financially encumbering the asset. The encumbrance must be taken for a justifiable, legitimate purpose. And the encumbrance itself can be voided if taken out within one year of filing bankruptcy.

Accounts-receivable financing. If you are a business owner, you may be able to borrow against the business’s accounts receivables. If accomplished correctly, encumbering the future value of the business may make the liquidation of your business unattractive to your Chapter 7 trustee.

Avoiding fraudulent transfers

If you have nonexempt assets, you should use bankruptcy planning to legally protect your assets from creditors. You should not, however, attempt to transfer assets after you have filed bankruptcy. In many cases, the Chapter 7 trustee can attempt to void transfers made within a year of your filing bankruptcy. Starting your pre-bankruptcy planning earlier rather than later can often protect otherwise liquid assets.

A “fraudulent transfer” is the conveyance of an asset within certain statutory periods prior to a bankruptcy filing. And any transfers or gifts of assets prior to a bankruptcy filing will be closely scrutinized by the Chapter 7 trustee. The Bankruptcy Code gives the trustee the power not only to avoid the transfer, but to move for the denial of discharge to a debtor who attempts to defraud creditors through sham transfers.

Protecting assets in bankruptcy: Talk to an attorney

If you are considering filing bankruptcy and have considerable assets to protect, talk to an attorney. Do not attempt to hide or conceal or transfer or sell your assets prior to discussing your intentions with a bankruptcy lawyer. Chapter 7 trustees will ruthlessly enforce all exemption, transfer, and scratch-back laws. Be sure to obtain advice before you make any big financial moves.

Debt Collection. If you have a debt in collection, you have rights. You’re likely going to want to hire a lawyer to enforce those rights. If you have many debts in collection, consider bankruptcy. If you have just a few debts, however, consider hiring an attorney to settle the debt.

Foreclosure. If you are in preforeclosure, act quickly to preserve your options. If you have a foreclosure auction scheduled, you only have two options: reinstate the loan or file bankruptcy. Timing is incredibly important in foreclosure cases. Contact an attorney immediately if you default on your mortgage.

Repossession. If you are facing repossession, you have options before the vehicle is repossessed. Afterwards, not so much. If you have a debt resulting from a former repossession, you can eliminate that debt in a Chapter 7 bankruptcy. If you want to stop a repo before it happens, a Chapter 13 bankruptcy may do the trick.

Garnishment. Garnishment can often severely impact your monthly finances, and garnishment reflects very negatively on your credit score and credit report. Often, the only way to terminate a garnishment wage order is by filing bankruptcy.

Taxes. If you withhold too little from your paycheck, you will get more money with which to pay your bills. But artificially increasing your deductions creates a tax liability for you at the end of the year. We can help you identify which deductions are appropriate for you. And we can help you determine which taxes may or may not be forgiven.

Lawsuits. You could spend thousands of dollars defending a lawsuit that you’re sure you will win. And then you might lose. In many cases, it makes sense instead to moot the suit in bankruptcy. On the other hand, it could make sense to fight the suit and attempt to settle. Talk to an attorney. Don’t try to handle a lawsuit on your own.

Student Loans. You may be in deferment or forbearance right now. But when your monthly student loan payment comes due, will you be able to pay it? Student loans are not dischargeable in a Chapter 7 bankruptcy. But paying your student loans in a Chapter 13 bankruptcy allows you some breathing room to pay your other debts.

Lee Legal Can Diagnose Your Financial Condition

Financial problems don’t solve themselves. Many financial problems aren’t even obvious problems at first. Don’t try to self-diagnose your condition. Seek out an objective analysis and generate a plan unique to your circumstances and goals. Call Lee Legal to schedule your financial diagnosis.

If You Can Afford to Pay Your Debt

Chapter 7 Bankruptcy. Your credit will show a Chapter 7 filing for ten (10) years. If you make enough money to afford repaying your debts, then you should do that. You may forego some money in the short-term, but avoiding bankruptcy when you can afford to repay may pay off for you big time in the long-term.

Chapter 13 Bankruptcy. If you can afford to repay your debt, but not in less than five years, then consider a Chapter 13 bankruptcy. Your attorney will propose a repayment plan suitable to your budget. And a Chapter 13 bankruptcy will remain on your credit report for only seven (7) years.

If You Are Uncollectible

You may make very little income or have no income at all. Social Security may be your only source of income. Your credit score may already be very low. If you have only enough money to pay for your most basic expenses, as well as those of your dependents, then you may be an “uncollectible” debtor.

If a creditor deems you to be uncollectible, then bankruptcy might not be the best choice for you. Questions of whether or not a person should file bankruptcy due to uncollectible status usually occur near end of life.

If You Have Mostly Student Loan Debt

Chapter 7 bankruptcy eliminates student loan debt only in the rarest of circumstances. If you decide to file a Chapter 7, it will not be to discharge your student loans. Chapter 7 won’t help you at all. Student loans are nondischargeable.

Still, Chapter 13 bankruptcy may help if your student loan payments exceed your living expenses. You can use Chapter 13 to reduce or delay altogether your monthly student loan payments obligations during the term of your Chapter 13 plan. Any balances remaining on your loans after the Chapter 13 bankruptcy is over, however, must be repaid.

If You Cannot Exempt All of Your Assets

Most people do not have to worry about unexempt assets. Most Chapter 7 bankruptcy debtors have “no-asset, no-distribution” cases. Even if you own some valuable property, in many cases it will not be financially feasible to liquidate it. The amount of your debt in relation to the value of your assets is a helpful but not entirely reliable indicator.

If you own many valuable assets, however, like real estate or cars or financial instruments of any type, then you must carefully weigh whether bankruptcy is the right choice for you. Likewise, if you are expecting an inheritance or have a valuable legal claim, disclose these assets to your bankruptcy lawyer right from the outset. Your bankruptcy lawyer will analyze how they fit into your larger financial picture.

When You Should NOT File for Bankruptcy

Bankruptcy might not help with child support. In some case, bankruptcy doesn’t help with eviction. Bankruptcy is not one-size-fits-all, and bankruptcy doesn’t fix every problem. A good bankruptcy lawyer will tell you when you should file for bankruptcy. But a great bankruptcy lawyer will tell you when you should NOT file for bankruptcy.

You get a tax refund when you over-withhold taxes in your paycheck. Many of our clients use this as a form of non-interest-bearing savings account. The most prudent use of savings is that which puts you in a better position to save even more.ç

Use Your Tax Refund to File Bankruptcy

If you qualify for a Chapter 7 bankruptcy and want to start rebuilding your credit, then you should use your tax refund to file bankruptcy. This may just be the one time of year that you can make a choice about how you want to spend your money. If you need to make a break from your financial past, call Lee Legal to discuss your financial future.

This year, you might not have to give your whole tax refund away to bills. Instead, you could discharge your creditors and keep your tax refund. If that logic fits your situation, then use your tax refund to file bankruptcy.

Qualifying for Chapter 7 with Student Loans

If your household income exceeds the median income of your jurisdiction, then you fail the initial means test. In that case, the Bankruptcy Code gives rise to a presumption that you are are abusing the bankruptcy process. The presumption is that you should file a Chapter 13 instead of a Chapter 7. While Chapter 7 entails the quick and simple elimination of debts, Chapter 13 requires an extended repayment plan.

Unfortunately, the Chapter 7 means test does not allow deductions for student loan payments. Because student loans can also be paid through a Chapter 13, monthly student loan payments may not be used to reduce disposable income in the Chapter 7 means test. Student loan payments, no matter how massive, do not affect your eligibility for Chapter 7 on the means test.

On the other hand, if your student loans dwarf the rest of your debts, then you may not have to complete the Chapter 7 means test at all. If you incur your student loans for a professional degree, for instance, then those loans are considered “business” debts. Debtors with primarily business debt (as opposed to consumer debt) need not complete the means test. See 11 U.S.C. 707(b).

Finally, student loans may not be listed as “special circumstances” on the means test as provided for by 11 U.S.C. 707(b)(2)(B). Most courts interpret the “special” circumstances section of the means test to require a debtor to prove “extraordinary” expenses. Student loans are not considered extraordinary expenses for means test purposes. Thus, neither the nondischargeability of the student loans nor the long-term obligation to pay them renders student loan special enough for the Chapter 7 means test.

Student Loans and the Means Test in Chapter 7 Bankruptcy

If you experience difficulty attempting to balance your budget with large student loan payments, consider consulting an experienced bankruptcy attorney. The issues are complex, and still evolving, but there are solutions. Talk it over and assess your options before you make any big decisions or just give up altogether.

Tax Problems in Bankruptcy: Chapter 7

Nondischargeability. Chapter 7 bankruptcy will not discharge recent taxes. Likewise, Chapter 7 does not discharge late-filed taxes. Only taxes over three years old with returns filed on time can be discharged in Chapter 7 bankruptcy. Older taxes may be discharged in bankruptcy. Otherwise, taxes pass through the bankruptcy discharge for many Chapter 7 filers.

Security Bifurcation. If the IRS has liened against your real property, then they may possess a bifurcated claim against you. In other words, part of your tax liability may be treated as priority; some treated as secured; and still another part may be considered unsecured nonpriority and therefore eligible for discharge. Assess your liability carefully. Do not expect either the state or federal taxing authorities to correct their own oversights or mistakes.

Tax Problems in Bankruptcy: Chapter 13 

Repayment in Full. Taxes are priority debts and therefore must be repaid in full during the course of the Chapter 13 plan. In some cases, that may simply reduce the payout to unsecured creditors. But in many other cases taxes may dramatically increase your monthly repayment amount. If you have assets to protect in a Chapter 13, your attorney should conduct a careful review of your total tax liability prior to filing your case.

Mandatory Filing Date. You must file your taxes on time to remain in a Chapter 13 bankruptcy. This year, that date is Tuesday, April 18, 2017. You may not file an extension to file your taxes in Chapter 13. You must file your taxes on or by Tax Day. In addition, you must also provide a copy of your federal and state tax returns to the Chapter 13 trustee. If you fail to do so, the trustee will file a motion to dismiss your case. Nobody enjoys filing taxes. But that will not suffice as an excuse to the court for not filing and submitting your returns.

Tax Problems in Bankruptcy

Tax problems frequently resolve themselves more easily once you are under bankruptcy protection. Take steps before you even file for bankruptcy. By filing your returns on time, many debtors are able to avoid the most common bankruptcy problems in bankruptcy. Sort out your tax situation with a qualified bankruptcy attorney.

Parking Tickets in Bankruptcy

Unfortunately, in most cases parking tickets cannot be discharged in Chapter 7 bankruptcy. Parking tickets are considered a debt to a governmental unit, which includes:

the United States, State, Commonwealth, District, Territory, municipality, foreign state, or department, agency, or instrumentality of the United States; etc.
11 U.S.C. § 101(27)

Besides parking tickets, Chapter 7 does not discharge other types of governmental debts, such as:

restitution, or a criminal fine, included in a sentence on the debtor’s conviction of a crime; or

a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit.
11 U.S.C. § 1328(a)(3), 11 U.S.C. § 523(a)(7)

Of course, recent tax liabilities are also not dischargeable in Chapter 7. The bankruptcy discharge specifically excludes from discharge:

a tax or a customs duty . . .

assessed within 240 days before the date of the filing of the petition.
11 U.S.C. § 523(a)(1),507(a)(8)

So the Bankruptcy Code treats parking tickets no differently than taxes, criminal restitution, or criminal fines and forfeitures. Do you think parking tickets rise to the same level as these other types of debts? Me neither. The nondischargeability of parking tickets denies many honest debtors a fresh start and should be dischargeable in Chapter 7 bankruptcy.

Parking Tickets in Chapter 13 Bankruptcy

Parking tickets in bankruptcy may be nondischargeable in Chapter 7, but you can discharge parking tickets and moving violations in Chapter 13 bankruptcy. While these debts are considered priority and must be repaid in full, you can pay them over five years, instead of immediately.

Chapter 13 prevents suspension of license due to unpaid tickets. Under a monthly Chapter 13 repayment plan, you will only have to pay what you can afford.

How to Pay a Parking Ticket in Virginia

You can pay your Virginia parking tickets online. They will also charge you a 4% inconvenience fee.

If you choose to pay by mail, in Virginia, you must make payment to the district court listed on the ticket. Here is a link to all Virginia General District Courts, including addresses and phone numbers.

How to Pay a Parking Ticket in Maryland

Pay your parking tickets online in Maryland and they will assess you a processing fee.

In Maryland, you can satisfy parking tickets by check payable to the “District Court of Maryland” and mailing along with your ticket to:

Maryland District Court
Traffic Processing System
P.O. Box 6676
Annapolis, MD  21401

How to Pay a Parking Ticket in the District of Columbia

Pay D.C. parking/camera tickets and also D.C. moving violations online.

If you choose to mail your payment, be aware that the District of Columbia government collects parking tickets for only a short period of time. Mail payment to:

District of Columbia
DMV Adjudication Services
P.O. Box 2014
Washington, DC 20013

After a period of time, the District of Columbia then sends its parking tickets to the collection agent Professional Account Management. You can pay Professional Account Management tickets online.

“Dear Debt” follows one woman’s quest to pay off her debts while juggling three part-time jobs, graduate school, and a long-distance relationship. Much of the book is cliché and platitude: move to a location with a lower cost of living, cut back on unnecessary expenses, etc. Many of the “tips” are not particularly constructive.  For instance, the author defines “debt fatigue” as losing your motivation, over time, to pay off debt. To fight debt fatigue, she suggests scheduling mini-rewards, like:

• Have a dance party in your bedroom
• Take a nap
• Volunteer your time and give to the less fortunate
• Create a fort in your living room with some sheets and blankets and go “camping”

No, I am not joking. This is an adult author making suggestions to other adults. While vounteering may be a noble concept, how it helps to fight fatigue defies comprehension. Likewise, most of my clients do not have the luxury of a nap while trying to pay off debt.

Yet the book does contain some more practical advice. For instance, the book’s main thrust posits that the best way to pay off debt is through “side hustles.” A side hustle is something that you can do to make money outside of your main job. You have to dedicate your nights, mornings and weekends to it. In return, you’ll get extra cash, additional freedom, and the ability to set your own schedule. The book apparently predates Uber and Lyft, because that is how most of my clients now side-hustle.

The most interesting section of the book addresses the Debt Snowball and the Debt Avalanche methods of debt repayment.

The Debt Snowball

The debt snowball method of debt repayment addresses debt fatigue more effectively than the debt avalanche. The debt snowball method takes a person’s emotions into account. In the debt snowball method, you repay the smallest debts first and make just the minimum monthly payments on other debts. With each payoff, regardless of how small, you score an emotional win and (theoretically) stay motivated during the long process of repaying all of your debts.

The debt snowball is not appropriate for everyone. For instance, if you have an enormous difference between your smallest and largest balances, the snowball method’s emotional motivation will not work for very long. And the method only works if you continue to pay the minimum balance on all debts. Late or missed payments break the model.

The Debt Avalanche

The debt avalanche method makes more sense for most situations. The avalanche values math over emotions. The avalanche also takes longer and can lead more to debt fatigue.

In the debt avalanche method, you pay off the higher interest rate debts first. Most financial advisers suggest this method. Paying off your higher interest rate balances first ensures that you pay less overall toward your outstanding debts. Although the avalanche is a tougher slog (no easy, early emotional victories), you save more money in interest. The avalanche also means the shortest possible time to repay all debts, not just the smallest ones.

The Debt Snowball and the Debt Avalanche: Which Method is Right For You?

So between the Debt Snowball and the Debt Avalanche, which is right for you? Perhaps a hybrid.

You should probably start with the debt avalanche method. But there is nothing preventing you from snowballing a smaller debt mid-stream. You can fight off debt fatigue by switching to a smaller debt and gaining an emotional boost from eliminating a creditor from your list. Then switch back to the avalanche and continue to tackle the higher interest rates.

There’s a reason why so many people get stuck in debt: getting out of debt requires a level of commitment and perseverance that can be tough to sustain. In many cases, bankruptcy is simply the better option than either the Debt Snowball and the Debt Avalanche methods. If you have many, many creditors, or the balances are too high to ever repay, Chapter 7 bankruptcy might be the better choice to repayment. Or a Chapter 13 bankruptcy may allow you to repay less than the balances in full. Consult with an experienced debt defense and bankruptcy attorney to learn which method is best for you.

Since October 17, 2005, the Department of Justice has promulgated median incomes for Chapter 7 debtors. To qualify for Chapter 7 bankruptcy, you must pass the “means test,” or Official Form 122A, Statement of Your Current Monthly Income. The higher the income levels, the more people who will qualify.

Some of the information on the form comes from personal income and expenses. Much of the information, however, is culled from Census and IRS data.

These numbers are very important. The U.S. Trustee’s Office uses the official means test numbers to sort between those who qualify for Chapter 7 bankruptcy protection and those who do not. To a household overwhelmed with debt, being denied a fresh start under Chapter 7 can have devastating impact.

For many years, D.C. means test numbers have belied the incontrovertible fact that raising children in the District is expensive. Or that caring for an elderly parent is expensive. Or that there are enormous differences in expenses between 2-person and 4-person households. The means test focuses on income and does not adequately reflect true household expenses.

The D.C. Means Test Numbers Are Patently Erroneous

Here’s a timeline of the changes to the D.C. means test numbers since October 17, 2005, when the Bankruptcy Abuse Prevention and Consumer Protection Act took effect.There are actually four lines in this graph, although there appear to be just three.

The Blue line represents a single person filing for Chapter 7 bankruptcy. Single-person household income in D.C. has increased from $38,349 in October 2005 to $51,260 today. The Yellow line, a four-person household, has experienced the most dramatic change, from $62,167 to $112,064.

But look at the Orange line, which represents a 2-person household. Wait. “What Orange line?” you say?

In fact, there is no Orange line. The 3-person household Gray line completely obscures the 2-person household Orange line. Over the past 11 years, the D.C. means test numbers for 2-person and 3-person households have been virtually the same. Take a look at the table below. The highlighted numbers are exactly the same.In 24 out of 28 times since the bankruptcy means test took effect 11 years ago, 2-person and 3-person households in D.C. have had the same Chapter 7 cutoff. Any household making more than those amounts was prima facie precluded from filing for Chapter 7 bankruptcy protection. In 82% of the total periodic adjustments by the DOJ to the D.C. means test numbers, an additional person in the household increased the Chapter 7 income allowance by exactly zero.

Perhaps even worse, 18 out of 28 of adjustments to income for a 4-person household were exactly the same as a 2-person household. That can’t be right. Probability must near zero that these differing household sizes produce the same incomes.

And remember: small changes in the means test numbers affect the eligibility for Chapter 7 for hundreds of debtors required to pass the D.C. means test. The D.C. means test numbers effectively preclude Chapter 7 protection to many otherwise worthy debtors.

The algorithm being used to calculate means test income figures for the District of Columbia requires revisiting. The same may well be true for other jurisdictions.

The Entire Means Test is Wrong

The stated purpose of the Chapter 7 means test was to force households to repay their debts based upon perceived ability. When it comes to who will qualify for Chapter 7 bankruptcy and who will not, miscalculated means test numbers add up to a serious disadvantage to discrete but easily discernible household structures. The young married couple with a child (or two). Siblings supporting an elderly parent at home. The grandmother or aunt supporting two (or three) children on her own.

The more people in a household, the higher that household’s expenses will be. But the Chapter 7 means test doesn’t properly contemplate expenses. Instead, it considers primarily income and only minimal expenses. The inequitable denial of Chapter 7 bankruptcy to households struggling with debt can be ruinous to entire family structures. The unfortunate state of the means test numbers for the District of Columbia only illustrates the futility of reducing the complexity of everyday household finances to a single, simplistic number.