I see and hear nothing

We’ve all seen the advertisements from debt consolidation and other companies (who, by the way, are owned by banks and credit card companies) instructing people with debt problems to contact them and avoid bankruptcy as an option.   They give their self-interested reasons for their position, most of which are untrue.

I decided to write this tongue-in-cheek post to give my reasons why someone with debt problems (also known as a “debtor“) should not look into bankruptcy as an option to resolve their debts.

Reason #1: You Prefer To Not Know All Your Options

This one is pretty basic.  Why get all the facts before deciding on something?    Just like going to a doctor for back pain.  One doctor tells you you need surgery.  Why would you want to learn about potentially superior and less invasive alternatives such as physical therapy, prolotherapy, etc?

The real answer is simple:  You cannot make an intelligent decision about anything without knowing the costs and benefits of all available alternatives.   If you close your eyes and ears to your options, you shut out possibilities.  When you are in dire financial straits, this is the time to fully examine your options, including bankruptcy, and determine what works best for you.

Reason #2:  You Prefer to Pay More Than You Can Afford

Did you know that in bankruptcy you often will pay far less (and often nothing) on your debts than you would if you try to do alternative resolution such as debt consolidation or negotiations?  Well, it’s true.  It depends of course on your budget and value of your assets and other considerations, but it is important to have a comprehensive consultation with a bankruptcy attorney to determine how it would affect and/or assist you.

Reason #3:  You Don’t Care About Tax Consequences

Did you know that if you do debt consolidation or negotiate with your creditors and they agree to accept less than 100% of what is owed, that the amount forgiven can become taxable income to you and that income can result in significant tax liability for you?   It’s true.   However, by federal law,  debts discharged (forgiven) in bankruptcy do not result in taxable income to the debtor.   Nifty, huh?

Reason #4:  You Have Rich Friends and/or Relatives

Hey, that’s great.  If they are willing to pay off your debts for you, you are a lucky soul.   However,  you still might want to explore bankruptcy as an option even if you decide not to use it.

Reason #5: You Enjoy Anxiety

What causes anxiety?  Generally it is fear of the unknown.   Nothing defeats anxiety like knowledge and taking charge of your actions.   Yes, Xanax and other drugs work nicely too, but they are short term solutions.   Learn about all your alternatives, including bankruptcy, and then decide what works best for you.

Bankruptcy: To Sum Up

There are lots of myths about bankruptcy but like most myths, if you take the time to learn the truth, you may find the myths to be false.   Most bankruptcy attorneys offer free initial consultations to go over your situation.  I encourage anyone with debt problems to take advantage of that to learn what may very well end up being your best option for a fresh start and debt relief.

Image courtesy of:  sonofgroucho

This article is part of my bankruptcy alphabet series

People are Not Numbers

When numbers are used to identify people, it’s usually when they are in prison.   The Bankruptcy laws used to be about helping out people (and businesses) in need.   They were about equitable solutions to serious financial problems.   Laws in general are designed to help society as a whole, but one must never forget it is always about people.   When a potential bankruptcy client comes into my office with debt problems, it is very personal to them.   Most of my clients never imagined being in this situation, and they would hope that the laws (and their attorney) are there to treat them as individuals, and not numbers.

The New Bankruptcy Laws

Back in 2005 the Republican controlled Congress and President G.W. Bush passed sweeping changes to the Bankruptcy Code that had been in existence for several decades prior.   These “new bankruptcy laws” were designed to reduce bankruptcy eligibility to a numbers game instead of basing it on need and the overall good for society.

Prior to 2005 the overriding purpose of the bankruptcy laws was one of equity.   I discussed courts of equity in my bankruptcy alphabet post on Justice.   Bankruptcy judges at that time had far more ability to balance the needs of a bankrupt debtor to get a fresh start with the rights of the creditors to get paid.

With the new bankruptcy laws, Congress instituted a very complex “means test” to determine threshold eligibility to file under Chapter 7.  The means test, in its base form, takes any and all income received by the debtor in the six calendar months prior to filing the bankruptcy case and subtracts from that certain expenses allowed under IRS guidelines (one size fits all, apparently).

The Saving Grace is Attorneys

While bankruptcy attorneys are of course bound by the laws, experienced ones have figured out where the laws can be applied beneficially for their clients and how to maximize the effectiveness for their specific case.   Similarly, while Congress tried to reduce the flexibility bankruptcy judges have to make equitable rulings, there is still plenty of room for Judges within the laws to do Justice and reach a fair and just result in each case, hopefully never forgetting these are people, not numbers in front of them.

The best way to avoid being just a number in the bankruptcy process is to hire a bankruptcy attorney that understands where the laws have been, where they are, and where they may be going.

Others Writing on the Letter “N”:

• Naked–New York Bankruptcy Lawyer Jay S. Fleischman
• Never–Cleveland Bankruptcy Attorney, William Balena
• No Asset–Metro Richmond Consumer and Bankruptcy Attorney, Mitchell Goldstein
• No Asset Report–Honolulu Bankruptcy Lawyer, Stuart T. Ing
• Non-PMSI–Philadelphia Suburban Bankruptcy Attorney, Chris Carr
• Nondischargeable–Northern California Bankruptcy Attorney, Cathy Moran
• Nondischargeable–Metro Richmond Consumer and Bankruptcy Attorney, Mitchell Goldstein
• Nondischargeable Debt–Omaha Nebraska Bankruptcy Attorney, Ryan D. Caldwell
• Notice–Colorado Springs Bankruptcy Attorney, Bob Doig
• Non-exempt Property–Miami Bankruptcy Attorney, Dorota Trzeciecka
• Notice–Taylor, Michgan bankruptcy Attorney, Chris McAvoy
• Negative Notice–Jacksonville Bankruptcy Attorney, J. Dinkins G. Grange
• NACBA–Wisconsin Bankruptcy Lawyer, Bret Nason
• California Nothern Bankruptcy Court, Cate Eranthe
• Non-Attorney Bankruptcy, Peter Behrmann

Image Courtesy of lrargerich

This article is part of my bankruptcy alphabet series

Here’s something many don’t realize.  You can earn above the median income for your location and household size and still qualify for Chapter 7  bankruptcy.    What’s that, you say?  You’ve read online (or your “Friend” told you) that if you’re below the median income, you can file for bankruptcy without doing a repayment plan (such as in a Chapter 13 case) and if you’re above it, you cannot.

A Little Knowledge Can Be Dangerous

The eligibility requirements for filing bankruptcy, particularly Chapter 7 are extremely complex thanks to the changes in the laws that went into effect in 2005.     The median income is a part of the “Means Test” analysis which is ONE of the tests used to determine eligibility.   It is possible to be below the median income and still not be eligible for Chapter 7, and it is possible to be above the median income and qualify.

Below Median Income Doesn’t Mean Automatic Qualification

The median income is merely the starting point.  If you are below the median income, for the income you received from ALL sources EXCEPT social security in the six calendar months prior to commencing the bankruptcy case, then you “pass” the means test (or, more accurately, the means test will not apply in that case).

However, you can be below the median and your budget of “actual” current income and expenses showing surplus income that could render you unable to remain in a Chapter 7 case.

The Means Test and Why Above-Median Doesn’t Mean Automatic Disqualification

If you are above the median income, then the means test must be performed.  The means test is a mind-numbingly complex, and somewhat random, set of calculations that includes certain allowed IRS expense deductions from your income, and other actual expense deductions, such as mortgage payments, etc.   After going through the test, if you are showing the ability to make a certain amount of payments to your creditors,  a “presumption of abuse” will arise in the Chapter 7 case and you may need to either switch to a Chapter 13 repayment plan, or have your case dismissed.

Similar to the under-median case above, if you pass the means test as an above-median income debtor, you can still be ineligible for Chapter 7 based on your actual current income and expenses if they are showing a surplus available to pay your creditors, based on allowed expense criteria.

See an Attorney

In short, it is virtually impossible to correctly anticipate what will happen in your case without having a qualified bankruptcy attorney represent you, not to mention correctly completing the required means test and other forms.

For others writing on the letter “M” see:

• Matrimonial Law in Bankruptcy    Philadelphia Suburban Bankruptcy Lawyer, Chris Carr
  Means Test    Omaha and Lincoln, Nebraska Bankruptcy Attorney, Ryan D. Caldwell
  Means Test    New York Bankruptcy Lawyer, Jay S. Fleischman
  Meeting of Creditors    Colorado Springs bankruptcy Attorney Bob Doig
  Modify    Northern California Bankruptcy Lawyer, Cathy Moran
  Monthly Income    Metro Richmond Consumer and Bankruptcy Attorney, Mitchell Goldstein
  Mortgage Arrears    Hawaii Bankruptcy Lawyer, Stuart T. Ing
  Mistakes    Cleveland Bankruptcy Attorney, William (Bill) Balena
  Marriage    San Francisco Bankruptcy Lawyer, Jeff Curl
  Members of Household Wisconsin Bankruptcy Lawyer, Bret Nason
  Mortgages and Bankruptcy Taylor, Michigan Bankruptcy Attorney Chris McAvoy
• Means Test-Marin County Bankruptcy Attorney Cate Eranthe
• Median Income–Livonia Michigan Attorney, Peter Behrmann

Image Courtesy of Double–M

This article is part of my bankruptcy alphabet series.

One of the most common situations we bankruptcy attorneys see in our practice is clients that have borrowed money from their 401k or other retirement plans to try and keep up with their debts.  Usually this is as a last resort before considering bankruptcy, but the last resort really should be whatever step they took before borrowing from their retirement.

Old fashioned 401k plan

Borrowing against one’s retirement is bad for a number of reasons.

Depleting your retirement will not help your future

You spent a lot of hours earning the money that is in your retirement and took the advantage of a retirement account to do so.  These accounts have many benefits, including that they are not taxed until you withdraw the money.  You also, in many cases, get a tax deduction for contributing to them as it reduces your gross income.  To take out a 401k or retirement loan, you must pay a fee to do so, making it even less attractive from a financial standpoint.

Failure to repay a 401k or other retirement loan will result in tax consequences.

If a retirement loan is not repaid, not only do you lose the fees you have to pay to take out the loan in the first place, but the loan then becomes taxable income to you.   Depending on your other income and financial situation, this can result in a significant tax debt.

Payments on retirement loans do not count towards bankruptcy eligibility

People think that a 401k loan is the same as a loan against their car, or house.  It is not.  You are simply repaying yourself.   As such, most (if not all) bankruptcy courts will not include the amount being repaid when analyzing your budget to see if you have income available to pay your creditors.   Thus, if you have net income of $3,000 per month, and necessary living expenses (such as rent, mortgage, car payment, food, clothing) of $3,000 per month, but $700 of that $3,000 is your retirement loan deduction from your paycheck, you will likely not be eligible for a Chapter 7 case, and would have to do a repayment plan in a Chapter 13 (or Chapter 11) instead.

This is one of the biggest obstacles clients of mine face.  They finally run out of options, and money, and decide they need a fresh start and want to file a bankruptcy but because of the 401k loan (which they think they MUST pay), they don’t have any surplus income, yet also may not qualify for a Chapter 7  (which requires no repayment to creditors).

Know the Risks Before Borrowing

I’m not saying that it never makes sense to borrow against your retirement.  Sometimes using it to save your home can be as important as the future benefit from the retirement funds themselves.   But be sure to understand the problems you are getting yourself into by doing so, and use that when weighing your decision.

For others writing on the letter “K” see:

1. 401k    Marin County Bankruptcy Attorney, Catherine Eranthe
2. Keep    Northern California Bankruptcy Lawyer, Cathy Moran
3. Keep your retirement accounts    Taylor, Michigan Bankruptcy Attorney, Christopher McAvoy
4. Keeping Secured Loans    Hawaii Bankruptcy Lawyer, Stuart T. Ing
5. Keeping your business     Dorota Trzeciecka Bankruptcy Blog
6. Keys    New York Bankruptcy Lawyer, Jay S. Fleischman
7. Kids    Colorado Springs Bankruptcy Attorney Bob Doig
8. Knowledge    Omaha and Lincoln, Nebraska Bankruptcy Attorney, Ryan D. Caldwell
9. Knowledge    Metro Richmond Consumer and Bankruptcy Attorney, Mitchell Goldstein
10. Know    Cleveland Area Bankruptcy Lawyer, Bill Balena
11. Keep    San Francisco Bankruptcy Attorney, Jeena Cho
    
12. Keeping Creditors at Bay  Wisconsin Bankruptcy Lawyer, Bret Nason
13. Knowing What Bankruptcy Attorney to Hire: Livonia Michigan Lawyer, Peter Behrmann

Image Courtesy of Kenteegardin

and www.SeniorLiving.Org

“A chair is still a chair
Even when there’s no one sitting there
But a chair is not a house
And a house is not a home
When there’s no one there to hold you tight,
And no one there you can kiss good night.”

-Burt Bacharach and Hal David

If there’s anything that is a centerpiece of an individuals’ bankruptcy case, it’s their house and whether they can keep and, if so, how?  I have many clients who call up and think that they automatically lose their home when they file a bankruptcy case.  I have others who believe that they get to keep their house under any circumstance.   The truth lies in between.

There are different options available regarding retaining property depending on which bankruptcy chapter is filed.

Keeping Your House in Chapter 7

In a Chapter 7 liquidation case, whether one gets to keep their house, or any other property for that matter, depends on how much equity is in it, and whether they have sufficient exemptions under applicable law to protect that equity value.    Exemptions are “protections” for value you have in certain assets such that they are “exempt” from collections.  Every state has different exemptions amounts available. Exemption laws are based on the state where you resided for the 2 years prior to filing your bankruptcy case or, if you lived in more than 1 state during that period, in the state where you resided for the greater part of the 180 days prior to that 2 year period.

How to Calculate Equity

How is equity calculated?  This is for some reason a big hurdle for many.  Calculating equity is simple.  You take the fair market value of the property (preferably from an appraisal, or at least a broker’s written opinion) and then subtract out the amounts owed to any mortgages or other liens¹ against the property, and that’s the equity.   In most courts, you can also subtract out another 8% of the fair market value for “costs of sale” of the property.

Assuming there is no equity, or you have sufficient exemptions to cover whatever equity exists, then the bankruptcy trustee will not sell (liquidate) the house.  However, there is still the obvious requirement that you must stay current with your contractually due mortgage payments in order to prevent foreclosure.

Keeping Your House in Chapter 13

Chapter 13 is very different.  You will not lose your house in a Chapter 13 regardless of how much equity there is in it.  However, any non-exempt equity will need to be paid to your creditors over the term of your repayment plan (36-60 months).  ²

Lien Stripping in Chapter 13 (and Chapter 11)

Another nifty feature of Chapter 13, not available (at least not yet) in a Chapter 7 bankruptcy case, is the ability to remove certain liens against real estate.   How and to what extent this can be done depends on a number of factors, including whether the house is the principal residence of the debtor.  If it is, then a junior mortgage can be “stripped” (i.e. removed) if the value of the property is less than the amount owed to any senior mortgages (e.g. the 1st mortgage). ³  For non-principal residences (such as a rental property),  even partially secured liens can be stripped down to the value of their lien.

Catch up on payments in Chapter 13 (and Chapter 11)

Another great feature of Chapter 13 is the ability to use your 36-60 month plan payments to catch up on past due amounts on your mortgage(s).  Frequently one files a Chapter 13 to gain the benefit of the automatic stay to stop a foreclosure, and then propose a repayment plan to catch up on the past due arrearages and reinstate the loan over a period of time.

But whether one gets to keep their house or not, they can always make another place their home because as the great songwriting team quoted at the top of this article point out, a house is not a home.

__________

¹ This excludes liens, such as judgment liens, when they are able to be removed in a bankruptcy case.  This will be discussed more in my Letter “L” blog.

² This isn’t precisely accurate.  Technically, in a Chapter 13 the debtor must pay more than the creditors would receive in a Chapter 7 case, so one gets to deduct anticipated Chapter 7 Trustee administration fees from the equation.

³ This may not be available in all bankruptcy courts, but is allowed in the Central District of California.

This article is part of my bankruptcy alphabet series

Others playing the Alphabet Game:

• Jay Fleischman believes that H is for Household
• Cathy Moran agrees that H is for House
• Cate Eranthe finds H to be about HOA  Dues
• Stuart Ing explains about Household Size
• Cleveland Attorney Bill Balena talks about Honesty
• Christopher McAvoy discusses Harassment
• Mitchell Goldstein examines Households
• Daniel Winter looks at Harrassment
• Kim Coleman-Hardship Discharge,
• Ryan Caldwell-Hearing,
• Jeena Cho-Home,
• Bob Doig-Homestead,
• Bret Nason-Honest But Unfortunate Debtor,
• Chris Carr-Honesty,
• Kurt O’Keefe-How much?
• Peter Behrmann-Household Median Income
• Christine Wilton–Hijacking

Image courtesy of james.thompson

These days the cost of everything is increasing.   Unfortunately, the cost for the privilege of filing a bankruptcy case is also increasing, according to the Judicial Conference for the United States Bankruptcy Court.

Filing fees for all fee-required documents to the bankruptcy court are increasing effective November 1, 2011.    In particular, the following are the new fees to be required for commencing cases under the “main” chapters:

Chapter 7-$306

Chapter 11-$1,046

Chapter 13-$281

The above are only a $7 increase from the existing fees, but an increase nonetheless.

Other fees, such as filing an adversary complaint, Motions regarding the Automatic Stay, and others, will also be increasing by differing amounts.

COURT FILING FEES ARE SEPARATE FROM ATTORNEY’S FEES

The above fees are paid to the court clerk.  They are always IN ADDITION to any attorney’s fees for representation in a case.

Image courtesy of Eric Steuer

You filed for Chapter 7 bankruptcy and had a balance due to the lender.  Faced with what seemed to be certain repossession, you agreed to sign a reaffirmation agreement.  All set, right?  Not necessarily.

There’s a moment in time when you reach a point of desperation.  You need that car to get to work each morning, pick up the kids from school, and a million other reasons.  It doesn’t matter that the car payments are bleeding you dry, the darn thing breaks down on a regular basis, or you just plain don’t like it.

You need a car, and you know chances are slim to none that you’re going to be able to qualify for new financing immediately after bankruptcy.

So you tell your lawyer to call up the car lender to get a reaffirmation agreement.  Your lawyer probably cautions you against committing yourself to new debt on the heels of bankruptcy.  Ultimately, you make the decision.  You sign on the dotted line.

What’s The Procedure?

You’ve got to sign an agreement that contains a number of disclosures.  Once that’s done, your lawyer’s got to sign the agreement as well.  That’s where it gets a bit thorny, because your lawyer’s signature means that he or she doesn’t think you’ll have a problem making the payments under the agreement.

Lots of bankruptcy lawyers don’t sign reaffirmation agreements for exactly this reason – after all, if you get in debt trouble after bankruptcy then your lawyer’s going to look pretty bad in front of the court.

If your bankruptcy lawyer doesn’t sign the agreement then it’s up to the judge to allow the agreement to stand or not.  If the attorney does sign, no court hearing is needed.

Filed And Honored

Under the bankruptcy laws, a reaffirmation agreement must be filed with the court in order to be valid.  If it’s not filed then the agreement isn’t binding.

Once the agreement is filed, you get 60 days (or the date of your bankruptcy discharge, whichever is sooner) to rescind it – in other words, you can still change your mind.  All you need to do is write a letter to the creditor and file it with the court.  Nothing fancy necessary to back out of the deal.

Effect Of Discharge

If your reaffirmation agreement is unfiled or rescinded in a timely manner then you’re no longer held personally liable for the debt.  You’re still going to make the loan payments (assuming the lender doesn’t repossess the car due to the bankruptcy filing, but that’s another article for another day) but if it’s repossessed then you’re off the hook financially.

Statements In The Mail After Bankruptcy

Your lender can’t legally send you statements each month after your bankruptcy discharge unless the reaffirmation agreement was in effect as of the date of discharge.  Any demands for payment are considered violations of the discharge injunction, and may subject the lender to legal action if you decide to sue.  For that reason, it’s a good idea to think about setting up an automatic payment system through your bank to ensure that payments are sent on time each month.

Your Credit Report After Bankruptcy

Once a debt is discharged in bankruptcy, the lender must update the consumer’s credit report to indicate a zero balance and the fact that the debt was discharged in bankruptcy.  No other information may be provided on a going-forward basis.  Though this protects you in the case of discharged credit card debts and the like, you need to realize that it applies to car loans without reaffirmation agreements in place.

Those car payments you’ve been making after your bankruptcy discharge aren’t going to help your credit score.  The lender may provide information on your payment history to a new prospective lender at your request, but nobody’s going to know about them solely by looking at your credit report.

If you’re habitually late on payments, that’s not so bad.  But if you’re making payments purely as a way to re-build credit after bankruptcy, it’s not going to help unless you’ve got a filed and binding reaffirmation agreement in place.

In the end, the decision is yours whether to reaffirm a debt or not.  Make the choice carefully, and know the implications for your life after your bankruptcy discharge is issued.

Image credit:  katherinetompkins

Jay S. Fleischman is a consumer bankruptcy lawyer who sues creditors and bill collectors for harassment after bankruptcy. When not helping people with bill problems, he works with attorneys to help improve their law firm marketing efforts.

Once you get to the promised land in a bankruptcy case–the date your discharge is granted–there is frequently confusion among many as to which of their debts were in fact discharged.   The confusion stems from expectations that there is some official specific ruling as to each debt.   That would be nice, but it’s not the way it works.

The Discharge Notice

When the discharge is entered in a bankruptcy case (for purposes of this article, I am referring to Chapter 7 or Chapter 13 cases; Chapter 11 is somewhat different) the only document that is sent out by the court is a 2-page document that generically states that “the debtor is granted a discharge”.  The second page lists, again generically, which types of debts are usually discharged, and which are not, but does not specify which debts in this case are discharged.

Figuring Out Which Debts Are Discharged

The reason it does not state which debts are discharged is that it is simply impossible.  The bankruptcy code provides numerous exceptions to which debts are discharged.   These exceptions are codified in section 523 of the Bankruptcy Code.¹   Some of these exceptions, such as debts incurred through fraud require the creditor to actively object  within a very specific time frame,  and prevail at trial, in order for the debts to not be discharged.  But many others are automatically not discharged if certain (and in many cases very complicated) conditions are met, and those conditions frequently have many exceptions of their own.  A good example of this is tax obligations.   For a quick look at how income tax dischargeability is determined, click here.

A lot of the criteria for determining whether a debt is discharged is subject to argument and can only be decided by a Judge if brought in front of the judge by one of the parties specifically.  Without that, the best the court can do is issue a general discharge that applies to all those debts which do not have a specific exception from discharge in the bankruptcy code.

Ask Your Attorney!

The bottom line is that most debts, such as credit card, medical, repossession and foreclosure deficiencies,  are in fact discharged.   But you need an attorney to really analyze your facts, preferably before you filed your case,  to let you know which debts might not have been discharged (yet another reason to have a bankruptcy attorney for your case–see more).  Ultimately, if there is a dispute, it will need to be decided by a Judge at trial.

¹ To further complicate matters, each bankruptcy chapter (7, 13, 11) incorporates various parts of section 523 differently, so a debt that is discharged in a Chapter 13 case, for example, may not be discharged in a Chapter 7 or 11, etc. )

Image courtesy of  kangotraveler

As many of you know, I answer a lot of questions posted on various free legal service sites such as avvo.com and allexperts.com.  One fact pattern I see repeatedly are clients who filed a Chapter 7 case and then find out to their horror that their bank–to whom they do NOT owe any money–has frozen the funds in their account. How can this happen? Doesn’t the automatic stay prevent this?

When this happens, I immediately know that they either represented themselves, or have an inexperienced attorney representing them.

At the present time, there are only a couple of institutions that do this (and one of them is Wells Fargo Bank). And how can they do this? The reason this is allowed is a rather esoteric and legalistic one. It basically has to do with the bank holding the funds as a custodian for the bankruptcy trustee. The funds aren’t seized–they are just frozen until such a time as the Bankruptcy Trustee directs the bank to turn them over, or “abandons” the asset back to the debtor. In most cases the debtor has an exemption which can protect the funds in the bank account. But there may be several weeks or even months where they will not have access to these funds, and this can cause obvious problems paying the rent/mortgage and other necessary obligations.

The obvious solution to this is to simply make sure that there isn’t a large amount sitting in one of these accounts on the date one’s bankruptcy case is filed. This is something almost any experienced bankruptcy attorney will advise his/her clients.

It is worth noting, however, that the above “freeze” only affects funds in a debtor’s bank account on the date the case is filed. it does not affect funds deposited after.

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.