Answers To Bankruptcy Questions
(1) What if I file and don’t qualify for bankruptcy?
There are areas of legal practice where a great deal of uncertainty exists. For instance, persons making application for social security disability benefits are many times denied benefits on their first few attempts. Bankruptcy is different. While it is impossible to provide anyone with an absolute guarantee, if you are being advised by a competent attorney and have produced all requested documents for his review and responded truthfully to his questions, you can feel confident in a recommendation to file for bankruptcy.
(2) What is the difference between Chapter 7 and Chapter 13 bankruptcy?
Chapter 7 Bankruptcy is often referred to as a “straight liquidation” case. This is because it permits the individual assigned to oversee your case, called a Trustee, to sell anything that you own with a value exceeding your available *exemptions (*legal protection for your assets). From start to finish, the case is generally concluded in fewer than six (6) months and even much sooner in some cases. No repayment of debt or loss of property occurs in a Chapter 7 case, unless you have assets that exceed your available exemptions. Therefore, prior to filing bankruptcy, you must carefully review all of your belongings and seek competent advice regarding their exemption status.
A Chapter 13 bankruptcy case involves proposing a repayment plan to repay some portion of your debt over a minimum of thirty-six (36) months to a maximum of sixty (60) months. Payments are made to a Chapter 13 Trustee who is responsible for distributing these payments to your creditors as outlined in your Chapter 13 Plan and required by law. The actual amount repaid is dependent upon such factors as the amount of disposable income in your household, the type of debt you are repaying and whether you own property exceeding your available exemptions. In many situations, a Chapter 13 bankruptcy can result in a very significant reduction of debt it may therefore be an option for debt relief when either Chapter 7 is unavailable for some reason, or it is advisable to adjust the terms of a secured debt or accomplish some other objective unavailable in Chapter 7.
(3) What is this means test that I have heard so much about?
The means test has important consequences for both Chapter 7 and Chapter 13 cases. Since the purpose of the means test, as well as its actual calculation, differs depending upon whether you are filing a Chapter 7 or 13 case, I will discuss each individually below.
The purpose of the means test is to create objective standards for determining whether an individual who has primarily consumer debt is able to repay at least some portion of his debt, or should be granted a discharge of his debts under Chapter 7. Based on these standards, Chapter 7 filings are classified as either abusive (unfair to creditors) or non-abusive. The means test is actually one of two initial tests that is used to determine eligibility for Chapter 7 when the debts are primarily consumer debts.
The first test is a median income test which requires the debtor to compare his gross income to that of a comparably sized household in his filing state. For instance, a four (4) person household in Florida is compared with the average income earned by four (4) person households in Florida according to government data. The gross income that is used for this comparison is the debtor’s average income for the six (6) month period ending with the last day of the month before the expected filing month. For instance, a debtor filing for bankruptcy in July would calculate his gross income based on the average income earned from January 1st through June 30th. If the debtor’s gross income is less than or equal to the average for Florida, he is able to file for chapter 7 without performing the means test.
If the debtor’s gross household income is greater than that of a comparably sized household, he must perform the means test. This involves calculating his “net disposable income” by subtracting from his gross income a combination of actual deductions and expenditures from his gross income such as taxes withheld and mortgages and expenditures that are deemed reasonable according to government standards such as operating allowances for vehicles and food/clothing allowances. It is important to emphasize that the expenses that are deemed reasonable are not your actual expenses in these categories but rather what government standards consider to be suitable.
Net income remaining after all of the appropriate deductions (too numerous to discuss here) have been made is regarded as available to repay debt. The basic principle of the means test is that when this remaining net income reaches certain levels, a debtor should be made to file under Chapter 13 and repay at least some portion of his debt. These amounts will periodically be adjusted for inflation, but at the present time they are as follows: A Chapter 7 bankruptcy filing will be presumed to be abusive if the debtor has sufficient net income to repay at least $11,725.00 to his unsecured creditors over the 60 month length of a Chapter 13 repayment plan. This is equivalent to $195.41 of net income per month. A Chapter 7 bankruptcy filing will not be presumed to be abusive if the debtor is unable to repay at least $7,025.00 to his unsecured creditors over the 60 month length of a chapter 13 repayment plan. This is equivalent to net income of less than $117.08 per month. Between these two extremes, a different rule applies. If monthly net income is between $117.08 and $195.41, a Chapter 7 filing is presumed to be abusive if the debtor can pay at least 25% to unsecured creditors.
In Chapter 13 bankruptcy, the median income means test serves basically two purposes: (1) it determines the required length of your Chapter 13 Plan (either 36 months or 60 months) (2) it is the starting point in determining the amount of monthly disposable income available for repayment of your unsecured debts. When average gross income exceeds the median for a comparably sized household, the Chapter 13 Plan must be proposed for sixty (60) months, unless you can repay 100% of your unsecured debt. If average gross income is below the median for a comparably sized household, the Chapter 13 Plan must be proposed for at least thirty-six (36) months, unless you can pay 100% of your unsecured debt. In determining whether the disposable income figure determined by the means test will be the actual amount required to be paid to unsecured creditors, the court considers whether your circumstances are expected to change and whether your true income and expenses reflect a greater ability to pay. For instance, if due to illness during the six (6) month period used for the means test calculation, you worked fewer hours than normal, your income would be understated on the means test. Assuming that you are now healthy and working full time, your creditors would be shortchanged if your were permitted to make payments based on this lesser amount of income. Therefore, the trustee would insist upon a larger payment reflecting your true ability to pay.