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.

A question I frequently get asked is whether filing a bankruptcy case will eliminate the liability of any co-debtors or co-signers on loans or other debts owed by the party filing bankruptcy.   The answer is no unless, of course, the debtor filing bankruptcy is doing a 100% repayment plan in a Chapter 13 or Chapter 11 case.

The key for this lies in a common misconception people have about what bankruptcy does.    Bankruptcy discharges the  party filing bankruptcy from the legal obligation of paying on a given debt;  it does not eliminate the debt itself.  The debt still exists  and the party who is owed the debt cannot pursue recovery of that debt from a party discharged in bankruptcy.

The entire reason for having a co-signer on a loan or credit card application, for example,  is so that if the primary obligor defaults on the debt (such as by filing bankruptcy), they can recover against the co-signer.

If filing bankruptcy could discharge the debts of people other than the party filing the bankruptcy, we could all benefit by having one person in the United States file a bankruptcy case, and we’d all be discharged from our debts.   That obviously doesn’t make any sense (fun though it may be to imagine).

Contrary to popular understanding, in most cases credit card debts are still dischargeable in bankruptcy without a repayment plan (in a Chapter 7 bankruptcy case).  In many cases, tax debts can also be discharged.   This is not new information, so why am I writing this?   Because not a week goes by that I don’t get a prospective client in my office who tells me they thought that when the bankruptcy laws changed in 2005 (yes, 2005) it eliminated the ability to get rid of credit card debt in a Chapter 7 case (as opposed to a Chapter 13 repayment plan).

This is NOT true.   While it was clearly the intent of  Congress to appease the credit card lobby and make it more difficult to eliminate credit card debt, the new bankruptcy laws which went into effect in 2005 made filing bankruptcy more complicated, but certainly did not eliminate the ability to do so.

Credit card debts are just as dischargeable as they were for at least 30 years prior to the recent law change.  They are not dischargeable if incurred through fraud or other exceptions to discharge (see http://www.bklaw.com/discharge.html for more information on this), but otherwise you can still file a Chapter 7 case (or a chapter 13 or Chapter 11) and eliminate credit card debt.

Income taxes may also me discharged under certain circumstances.   The law has not change on this in over 30 years.   It is a very complicated analysis, and dischargeability can only be determined after analysis by a professional of ACTUAL internal transcripts from the taxing agency, but the basic rule is that if the taxes are older than 3 years from the date the return was last due to be filed, and the return was filed more than 2 years ago, and not assessed  in the last 270 days, then they may be dischargeable.  To see more on tax discharge in bankruptcy,  visit http://www.bklaw.com/taxes_bankruptcy.html

The bottom line is, don’t believe rumors.  Talk to a bankruptcy attorney about your options.

For more interesting bankruptcy myths, visit http://www.bklaw.com/bankruptcy_myths.html