In the last two years, household incomes have generally fallen in South Carolina, pulling a cruel switcheroo on many distressed middle-income families at a time when the economy makes avoiding bankruptcy especially difficult.
An early but pivotal stage of the means test requires us to determine whether our clients’ household income is above or below the median family income for their family size here in South Carolina. The answer can influence whether Chapter 7 is an option for those clients and how much and how long they must pay toward their debts if they file Chapter 13.
The bankruptcy laws provide for periodic updates to the median income figures we must use to compare against debtors’ income. During normal times, when incomes are increasing, this rule helps debtors, much like a cost-of-living increase helps retirees. But the decline in median incomes since their peak late 2009 has put a bankruptcy law squeeze on the most productive working people that compounds the economic squeeze they face every day.
In South Carolina the median income for a household of one, as applied beginning November 2009, was $39,191. Two years later, it had fallen to $36,660, a decrease of 3.9%. Middle-sized families showed larger declines, topped by three-person households, where income decreased by 8.1% during the same two years. In early 2010, a couple from Irmo who had two children and an annual income of $65,000 were slightly below median. Now they are above.
So the means test is now hitting harder on middle-sized families with middle incomes–the people who pay their taxes and play by the rules, and the segment of the population that has made America great.
The irony is that the means test can actually be beneficial for those in higher income brackets who file Chapter 13. In calculating how much they must pay their creditors, they can deduct certain fixed amounts of allowed expenses–including auto, home, and medical expenses–that may be more than they actually spend. We take advantage of that idiosyncracy when we represent upper-income clients, but it’s not fair to the folks in the middle.
Aside from the political lessons these facts teach, the practical lesson for those in financial distress is that it is even more important than ever to consult a bankruptcy lawyer who is experienced in applying the means test and thoroughly knows the complex legal precedents on how it works.