How are assests sold counted as income before 6 month 122a-1 current monthly income

[bornfree2]

I am confused on how to account for an asset sold before the 6 month period prior to filing for purposes of form 122a-1.

Lets assume filing date is 1-1-2022
6 months from that is 7-1-2021

Lets say during 7-1-2021 -> 1-1-2022, the debtor gets 'income' from

- gifts from friends and family
- selling assets on ebay, that produce cash to pay bills

I guess thats seen as 'income' in form 122a-1 correct? First, its ridiculous to establish a 'current' monthly income from a one time assset sale that produce some income once. So why are assets sold treated as income?

Secondly what about transactions prior to the 6 months, ie. June 30?

- debtor sells an asset on June 10, and has cash that is used all throughout July expenses

Is that cash-from-asset-sale-before-6-month included as income in the 122a-1 calculation?

It seems unfair that if someone was selling their last belongings to survive, this calculation algorithm treats this as income going forward.

Do i understand this all wrong?

[justbroke]

Depends where you are. At least one Florida (bankruptcy court) judge got it wrong. But, the majority of courts, and appellate courts which have reviewed this question, is that the sale of property does not result in income, unless there is a profit. (Much like the IRS' general position on sales of property... only a gain could be taxable. IRS rules are more complex than that statement, but we'll go with it as the general rule.)

Gifts from family members is income. Remember, the bankruptcy code looks at income from all sources regardless of taxability. The only things which are excepted from this definition are SSA payments, some obscure war-related payments, and certain military benefits.

As far as liquidating (selling) an asset prior to filing, you will need to disclose this on the Statement of Financial Affairs (SOFA). This is so that the Trustee can assure that you didn't offload property to insiders to keep the money away from the creditors. (Or to buy it back from the purchaser later at the reduced value.)

Generally speaking, those filing a Chapter 7 have very little money on which ot survive and this usually doesn't become an issue. But selling your jetskis to your cousin for $1,000 will definitely have a longer lookback and the Trustee will clawback that transaction. Even if you sold it for $1,000 to your neighbor (arm's length to a non-insider and not a close friend), that will also bring the Trustee's clawback powers into the picture. (I'm assuming the jetski's fair market value at the time of transfer was greater than $1,000.)

[bornfree2]

well i got that form all wrong then ........................ wasnt there a lottery ticket program to get a seat to mars i was reading about?

[justbroke]

Let me add that the residual funds from the sale of an asset prior to bankruptcy could become property of the bankruptcy estate. This can happen if the property/asset is not exempted, the debtor lacks sufficient exemptions to cover the property, and/or the exemptions don't apply.

For example, some States have a good exemption scheme for cash. Sometimes the cash is covered under the wild-card exemption. However, there are States which restrict the wildcard by excluding cash over a certain amount. In other words, the wildcard may be $4,000 but it may only protect up to $400 in cash (on deposit or in hand).

[bornfree2]

So if debtor sold an asset, and it wasnt properly moved from cash to an 'exempted property', then what happens? If the cash was spent then what does trustee do? sue debtor ? or kick them out of the case? take everything and dismiss case and debtor now has absolutely nothing with no protection. haha, what a scam.

if debtor sold asset to pay for rent in cash-, isnt housing an exemption in and of itself?

even in bankruptcy they manage to squeeze blood out of a stone?

[justbroke]

Nope. Spending money to live is not considered to be wasting the money. For example, paying for housing, vehicle, food, clothing, and other "necessary" item to live (e.g. necessities), will not cause the Trustee to be upset. In some cases, people have even converted non-exempt money (or potentially non-exempt money) into something exempt. I don't recommend doing that without consulting an attorney to make sure that conversion is not an issue.

But for your question, the Trustee may question what you did with money, but they know when it's obvious that you were just trying to live.

[bornfree2]

If 122A-1 results in being way below the state medium income for purposes of establishing abuse, is that the end of the worries? I think i remember reading a discussion where if there was a difference between income and expense that difference is 'disposable income' and thus should be given to creditors and the case should be converted to 13 from 7. Is that such a thing? Can creditor or trustee or court 'encourage' a debtor to go to 13 or risk dismisal of 7?

[justbroke]

If 122A-1 results in being way below the state medium income for purposes of establishing abuse, is that the end of the worries?

I'll answer how the lawyer's answer... it depends.

There are many factors. As some just opine, the Means Test is only the "beginning" of the inquiry. For Chapter 7s, the United States Trustee (UST) may view an under-the-median person as "automatically" qualifying. In other cases, they may look to Schedule I/J and/or look at the totality of the circumstances.

The general rule, though, is that those that are under-the-median do not complete the second part of the means test and get to check that there is no "presumption of abuse." If, however, the UST sees indications under a totality of circumstances review, that you may not be deserving, the inquiry may not stop there.

I think i remember reading a discussion where if there was a difference between income and expense that difference is 'disposable income' and thus should be given to creditors and the case should be converted to 13 from 7. Is that such a thing? Can creditor or trustee or court 'encourage' a debtor to go to 13 or risk dismisal of 7?

If a case is a presumptively abusive (e.g. over-the-median) or the debtor shows significant DMI (forms I/J), then the case will be dismissed. The debtor is given the opportunity to convert rather than have a dismissal. I usually don't keep up with the current numbers, but the amount of DMI generally acceptable is an amount under about $252/month (this is as of 4/1/2022 where the maximum DMI is $15,150 over 60 months). The presumption may start at $161.75/month ($9,705 over 60 months). There are also other factors for the Means Test.

[bornfree2]

One last thing to say bout this. somebody out there is out to get Debtor!