Maybe. It depends. Most people want to file a chapter 7 bankruptcy because it wipes out most unsecured debt, such as credit card accounts, utility balances, and medical bills, without requiring the debtor (filer) to make a monthly payment to creditors for three to five years. However, not everyone meets the requirements of the Chapter 7 discharge (the order that wipes out qualifying debt). You must pass the two-step means test. Even so, it’s possible to pass either part while making a considerable amount of money.
The first part asks whether your family income is less than the median family income of your state. If it is, then you automatically qualify, and you don’t have to complete the second portion. If your income is high, you can pass the first portion if you support a significant amount of people.
Even if your family income exceeds your state’s median income, you have another chance to meet qualification requirements. You’ll be able to subtract certain expenses some actual, others predetermined from your income. If the amount remaining (called your disposable income) is insufficient to fund a Chapter 13 repayment plan, you’ll qualify for Chapter 7 bankruptcy.
Deductible expenses include:
• mortgage and rent expenses
• vehicle and transportation expenses
• utility bills and food
• childcare expenses
• income taxes
• mandatory payroll deductions
• tithing, and
• life insurance policy premiums.
You’ll want to be sure that you can provide proof of any and all claimed expenses.
No Income Limitations in Chapter 13 Bankruptcy
If you don’t pass the means test, it’s likely that you’ll be able to reorganize your debt under Chapter 13 bankruptcy (or Chapter 11 bankruptcy, in some cases). In this chapter, you’ll pay your disposable income into a three- to five-year repayment plan. After it’s complete, the court will discharge most remaining unsecured debt balances.
Each bankruptcy chapter offers different benefits that help solve distinct financial problems. So, you’ll want to consider more than the amount of money that you make when deciding which form of bankruptcy is right for you.
For instance, here are a few examples of issues that might make filing for Chapter 13 bankruptcy a better option than a Chapter 7 case:
• You need to save a home from foreclosure or a car from repossession.
• You need time to pay a debt that won’t get wiped out in bankruptcy, such as most taxes and support obligations.
• You want to discharge your obligations under a marital property settlement.
• You’d like to rid yourself of debt related to security violations or wrongful acts against a federally-insured bank or credit union.
Keep in mind that each person’s case is unique. An easy way to determine the most advantageous approach is to meet with a knowledgeable bankruptcy attorney.
Presumption of Abuse
High income earners who file Chapter 7 bankruptcy will need to make it clear that they’re filing their case in good faith. Their expenses must be reasonable and fair to their creditors. Generally speaking, you will not be allowed to pay for luxury goods and services while failing to repay your unsecured creditors. For example, it isn’t likely that a high income earner will be allowed to pay for their adult child’s education while discharging their credit cards in bankruptcy. If you’re a high income earner, talk to an attorney about which bankruptcy chapter may be a good choice for you. If you don’t qualify for Chapter 7 bankruptcy because of the means test, you might consider Chapter 13 bankruptcy. Although most people don’t want to pay into a three to five year repayment plan, Chapter 13 offers many benefits not available in Chapter 7. So even if you make too much to qualify for Chapter 7, filing Chapter 13 might be the right choice. For instance, in Chapter 13, you can:
• keep all of your property
• catch up on missed mortgage or car payments
• pay off debts you can’t wipe out, like domestic support obligations
• reduce your car loan balance, and
• eliminate a second mortgage or another junior home loan.
Keep in mind that all of these benefits come with separate qualification requirements. For example, you might need sufficient income to pay off a debt, or your loan might need to be old or underwater.
How Chapter 13 Bankruptcy Works
Failing the Chapter 7 means test the test that qualifies you for Chapter 7 tells the court that you have sufficient income to repay at least some of your debts through a repayment plan. That’s what you’ll do in Chapter 13 bankruptcy. You’ll pay back a certain amount of your debts through a three to five year plan. The Chapter 13 bankruptcy trustee distributes the money to your creditors according to the plan terms. That doesn’t mean that you have to pay back all of your debts. The amount you’ll pay will depend on your income, expenses, assets, and debt type. You’ll typically pay the greater of:
• disposable income—the amount left after deducting necessary expenses
• priority debts—obligations you must pay in full, such as recently-incurred taxes, or
• Non-exempt assets—property you can’t protect with a bankruptcy exemption.
Chapter 13 Advantages and Disadvantages
Here are some of the many benefits and options not available through Chapter 7, as well as the hurdles they present for some filers.
You Can Keep Your Property in Chapter 13 Bankruptcy
In both Chapter 7 and Chapter 13, you’re allowed to keep property you’ll need to work and live. Your state sets out the property you can protect in exemption statutes. In Chapter 7, the trustee sells non-exempt property that you can’t protect and distributes the proceeds to your creditors. Unlike Chapter 7 bankruptcy, the Chapter 13 trustee doesn’t sell your non-exempt property to pay your creditors. But that doesn’t mean you get a windfall. You’ll pay the value of your non-exempt assets and a portion of your debts through your repayment plan. The cost of your non-exempt assets is the same as the value of the assets the trustee would sell in Chapter 7. In exchange, you’ll keep all of your assets. Of course, this advantage comes at a price. The filer must have sufficient income to pay for the non-exempt property through the plan. If it isn’t feasible to do so, a debtor would have to consider other options. Options could include selling the property and paying off debts directly, or putting the sales proceeds toward the plan repayment.
Catching Up on Missed Mortgage Payments with Chapter 13 Bankruptcy
Many people seek Chapter 13 bankruptcy protection when they’ve fallen behind on mortgage payments but want to keep their home. The automatic stay stops collection activities and helps the filer avoid foreclosure. The debtor must continue to pay the monthly payment while catching up on the missed payments. While it can be costly, the missed payments are spread out over three to five years. A filer without sufficient income to cover the current payment, the missed payments, and other required Chapter 13 obligations, won’t get repayment plan court approval (confirmation). It’s likely that the filer would need to let the home go back to the bank to proceed with Chapter 13. Some courts offer loan modification assistance. You should be able to learn more by consulting a local bankruptcy attorney.
Chapter 13 Repayment Plans Help You Pay off Non-dischargeable Debts
Bankruptcy doesn’t discharge (wipe out) certain types of debts, called non-dischargeable debts. In Chapter 13, debtors can pay off a non-dischargeable debt over time without fear of collection actions such as a wage garnishment or loss of property.
Here’s the downside of this benefit: If the debt is also a priority debt, the debtor must pay it in full in a Chapter 13 plan. Examples of priority non-dischargeable debts include alimony, child support, and recent tax obligations. A filer who doesn’t have sufficient income to pay off priority debts in full won’t be able to confirm a plan and won’t qualify for Chapter 13.
Cramming Down a Car Loan in Chapter 13 Bankruptcy
If your car is worth less than what you owe, you might be able to reduce the balance of your loan to the value of the vehicle using a Chapter 13 cram down. To qualify for a car loan cram down, you must have purchased the car at least 910 days (approximately two and a half years) before filing your case. In this situation, you’ll need to repay the entire cram down amount in your repayment plan. Find out more about how car loan cram downs work in Chapter 13 bankruptcy.
Chapter 13 Can Get Rid of a Second Mortgage
One powerful benefit offered by Chapter 13 bankruptcies but not Chapter 7 is the ability to remove unsecured junior liens (such as your second mortgage) from your house in a process known as lien stripping. If the balance of your first mortgage exceeds the value of your home, your second mortgage or another junior lien is considered wholly unsecured. In that instance, it can be eliminated through lien stripping in Chapter 13 bankruptcy. The downside is that you’ll have to prove the value of your home to the court. Hiring an appraiser to testify can be costly as well as paying for your attorney’s time. Although if you’re paying a lot of unsecured debt, the attorney might be able to roll it into your plan payment without changing the monthly amount. Find out more about removing a second mortgage in bankruptcy.
Chapter 7 Bankruptcy Income Limits
Exception for Non-Consumer Debt – If more than 50% of your debt is considered non-consumer debt, you’re automatically exempt from the means test calculation. Non-consumer debt is also called business debt because it’s incurred with a business or profit motive. If you’re not sure if you have business debt, consider speaking to a bankruptcy attorney about your situation and the types of debt you have.
The Chapter 7 Income Limits and the Bankruptcy Means Test
The bankruptcy means test is a calculation laid out in the Bankruptcy Code. The starting point for this calculation is the state’s median household income. This median income can be considered part of the Chapter 7 income limits. If your household income is less than the median household income for the same household size, you make less than the income limits. You pass the Chapter 7 means test and qualify for Chapter 7 bankruptcy. If your household income is greater than the median, you may still qualify for Chapter 7 bankruptcy, if your household expenses under means test calculation don’t leave you with any disposable income.
Comparing your Household Income to the Median Income
The first part of the means test compares your average income to the median household income for the same household size. The median income depends on the state you’re filing bankruptcy in.
Determining the Median Income for your Household Size
The income limit for your state and household size is based on data from the Census Bureau and it changes multiple times per year. To find the most up-to-date information, go to the website for the United States Trustee (or UST) on means testing and choose the current option in the drop-down menu titled “Data Required for Completing the 122A Forms and the 122C Forms.” This will bring you to a new page on the Justice Department’s website that provides a link to the Median Family Income Based on State/Territory and Family Size provided by the Census Bureau. From there, you’ll be able to pull up a table showing median incomes, by household size, for each state.
Calculating your Current Monthly Income
Your current monthly income under the means test is based on your monthly income in the 6 months before your bankruptcy filing. This doesn’t include the month your bankruptcy case is filed in.
Step 1: Add Up All Income from the Last 6 Months
Your monthly income is calculated by adding up all countable gross income you received in the 6 month period you’re using for your means test. Gross income is not the same as your take-home income. It’s before taxes and other deductions are taken out. Countable income includes income from wages, alimony, child support, rental income, and any other money you receive on a regular basis. Social security income (SSI or SSDI) is not added when calculating your current monthly income. If your only source of household income is SSI or SSDI, you pass the Chapter 7 means test without having to do any math.
Step 2: Divide Result By 6
Once it’s all added together, divide the total by 6. The result is your current monthly income under the bankruptcy means test. If your income fluctuates from month-to-month, your current monthly income under the means test may surprise you. Remember, it’s an average taken over the last 6 months. If you received significant overtime pay, income from extra gig-work, or a bonus during the 6 months, your average monthly income will be higher than what you’re actually earning now. Similarly, if you were out of work for 4 out of the last 6 months before finding a new job, your average income under the means test will be much lower than what you’re making now.
Step 3: Using Your Current Monthly Income to Determine Your Annual Income
Take your current monthly income as calculated and multiply it by 12. This is your annual income according to the means test calculation. Compare that number to the annual income for your household size in your state. If your annual income is less than the median, you pass the Chapter 7 means test. If your income is greater than the median household income, you’ve failed the first part of the means test. You may still be eligible to file Chapter 7 bankruptcy based on part 2 of the means test.
Comparing your Current Monthly Income to Your Household Expenses
The second part of the means test calculation determines whether you have any money left over after paying your monthly living expenses. If the answer is yes, you have disposable income. If you have a high disposable income, the Bankruptcy Code requires that you use it to pay down your debts in a Chapter 13 bankruptcy before you can get a bankruptcy discharge.
Only Certain Expenses Are Considered
This is where things get very technical, as only some types of monthly expenses are taken into consideration, so hiring a bankruptcy lawyer can be useful. The purpose of these allowed deductions is to determine whether your income is enough to cover your living expenses and repayment of your debts. A bankruptcy lawyer can give you legal advice on what’s an allowed monthly expense and what isn’t.
Expenses are Forward Looking
Your average monthly income is calculated by looking to the past. Your expenses, on the other hand, are forward-looking and based on your actual monthly expenses. If your old health care plan cost $600/mo. but you were able to switch to a cheaper plan for $300/mo., the means test calculation will show this as a $300/mo. expense.
Pay check Deductions
Pay check deductions for income taxes, social security, health insurance, disability insurance, term life insurance and health savings account expenses are considered allowed monthly expenses. The same is true for deductions you didn’t really have a choice over that are required as part of your employment. Examples include mandatory retirement contributions, union dues, and uniform costs.
While it’s probably an involuntary deduction, a wage garnishment is not automatically allowed as an expense in the means test calculation. If the wage garnishment is the result of a lawsuit filed by a credit card company for an unsecured debt, the automatic stay stops that garnishment once your petition for bankruptcy relief is filed with the court. And, since the unsecured debt will be discharged, it’s not going to be an expense for you going forward. The only exceptions are garnishment orders in place to make monthly payments for ongoing child support or alimony obligations. These domestic support obligations are not dischargeable and will continue to be deducted from the filer’s pay check. They are an allowed monthly expense.
Regular Living Expenses Are Based On National Standards
To make sure things are as fair as possible to everyone filing bankruptcy, there are limits. Otherwise, what’s to stop someone from spending $500 on new clothes and $800 on eating out every month? Excessive spending like that would surely leave no disposable income to pay creditors and shouldn’t be rewarded with almost instantaneous debt relief through Chapter 7 bankruptcy. To account for regional differences, some of these expenses are based on national standards, while others are based on local standards. Monthly expense allowances under these standards vary by household size. It’s broken out as follows:
• food (groceries and eating out)
• clothing and services (think dry cleaning)
• housekeeping supplies
• personal care (haircuts, for example)
• health care expenses
• utilities and housing maintenance
• mortgage or rent expenses
• transportation expense, including public transportation
• vehicle operating costs
Actual Necessary Expenses
These are expenses that you actually pay every month that are not already accounted for in the local or national standards. If Utah Trustee in your district picks your case for an audit, you’ll be required to show documentation that you’re making these monthly payments. They include the following:
• term life insurance for yourself
• education for employment that is a condition of your employment
• expenses incurred for the health or welfare of physically or mentally challenged child
• child care expenses, like babysitting, daycare, and preschool
• medical bills exceeding the national standards for health care expenses
• certain insurance premiums
• charitable contributions (up to 15% of gross income)
When you need legal help with a bankruptcy lawyer in Utah, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506
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