Credit card and student loan payments do not factor in to the analysis for determining Chapter 7 eligibility. It seems not a day goes by that I’m not trying to explain to a potential client why their payments to debts owed to unsecured creditors do not count in their budget in determining eligibility to file under Chapter 7 of the Bankruptcy Code. They certainly aren’t an allowed expense on the dreaded “means test“, which uses specific expenses allowed by the IRS. But it also doesn’t “count” as part of an ordinary current income/expense analysis, which is also used for determining eligibility. If such an analysis shows a surplus of income, then one may not be eligible for Chapter 7 and may need to do a Chapter 13 or Chapter 11 (if too much debt for Chapter 13) repayment plan instead.
A typical scenario is where the client has income of, let’s say $5,000 per month; $3,800 after taxes. Their monthly expenses–as they see them–are $5,000 per month, so there’s no way they cannot qualify for a Chapter 7 case in their minds because they have a monthly deficit of $1,200. But of that $5,000 per month in expenses, $1,500 are minimum payments on credit cards, and $600 for student loan payments, neither of which qualify as “necessary living expenses” in a bankruptcy case. So when those are subtracted out, the client has almost $900 per month they can afford to pay to their creditors, according to their budget. This is probably way too much of a surplus to do a Chapter 7 case. The court, instead, would want them to repay that amount to their creditors over 36-60 months in a Chapter 13 case.
Doing so may repay anywhere from approximately 10%-100% of their unsecured debts depending on what they owe (with any unpaid portion being discharged in the Chapter 13 or 11 case), but the point is their creditors will be receiving something and that is the criteria.
Except for certain taxes, domestic support obligations and other debts designated as “priority” debts under the bankruptcy code (11 U.S.C. 507), you can’t use credit card payments, student loan payments, or payments on any unsecured debts you owe as an expense in your budget to determine what you can afford to pay to your credit card, student loan, or other unsecured lenders! That would be nonsensical. One stated purpose of the bankruptcy law is to have those that can afford to make payments on their debts do so, and those who can’t don’t. If your budget shows you have the ability to make some meaningful payments on your debts as shown above, you will likely not be eligible for Chapter 7 but will need to take advantage of a different bankruptcy chapter.
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