To qualify for a Chapter 7 bankruptcy in Kentucky, an individual must pass a bankruptcy means test. This test has two parts. You automatically qualify if your income is below the average income for your household and family size. You can also qualify if your reasonable and allowed expenses deducted from your income does not leave anything to make a Chapter 13 payment. The bankruptcy means test averages your last 6 months of income to calculate an annual income. There are no debt limits to a Chapter 7. Both corporations and individuals may file Chapter 7. Debtors with primarily business debts automatically qualify for Chapter 7. By filing an individual Chapter 7 or 13 your business may not have to file.
The Bankruptcy Means Test
Debtors that have predominately business debts are not required to pass the means test to file Chapter 7. The bankruptcy means test has two major parts: First, if your income is less than the average income for your family size in your area then you automatically pass the means test and you can file a Chapter 7 bankruptcy. These amounts adjust yearly. Below are the average family amounts for Kentucky. Each state and county have different average incomes. Income is determined by the prior 6 months of income divided by 6 and then multiplied by 12 to get the average annual income for the bankruptcy means test.
Even if your income is greater than the average family income you may still pass the bankruptcy means test and be able to file Chapter 7 bankruptcy if after deducting for reasonable and necessary expenses. If there is about $150 or less in disposable income left or if what is left pays back less than 25% to unsecured non priority creditors.
The bankruptcy means test is only a presumption that your filing is or isn’t filed in bad faith. Some facts such as a sudden disability may allow you to file a Chapter 7 even if you fail the means test because a Chapter 13 may not be feasible. You only need to explain a reason that allows you to file such as retirement or sudden disability to overcome this presumption. Your income being seasonable may also be a very good reason to prove that the means test should not be a basis for you to be denied filing as a Chapter 7.
The bankruptcy means test only forces consumers to file a Chapter 13. If over 50% of your debt is business debt the means test does not apply to you. Some attorneys brag that 95% of their clients file Chapter 13. Chapter 13 pays an attorney three times the average Chapter 7 fee. Make certain that Chapter 13 works for you not your attorney and that a Chapter 13 is affordable and serves your goals. At the same time a bankruptcy requires that the debtor files in good faith and uses their best efforts to repay. If the disposable income is there the debtor must file a Chapter 13.
Only an individual is eligible for a Chapter 13 and only if the unsecured debt is less than $360,475 and secured debts are less than $1,081,400 in 2012. 11 U.S.C. § 109(e). These amounts are adjusted annually by the consumer price index. Corporations can only file a Chapter 7 or Chapter 11.
If a Chapter 13 plan fails the debtor can have a second chance but it gets harder every time. If a Chapter 13 debtor filed a petition within the prior year the Debtor has to ask for the protections of the automatic stay. If the Chapter 13 debtor has filed two cases in the prior year there is no protection.
A person that crosses a state line must use the lower exemption from those states. A person who is close to the poverty line may pay the filing fee in installments. But paying a filing fee in installments makes his petition extremely likely to be dismissed if the payment deadline is missed and paying a fee in installments draws unwanted attention to his case.
No individual may file under any chapter of the Bankruptcy Code unless he or she has, within 180 days before filing, received credit counseling. 11 U.S.C. §§ 109, 111. If a debt management plan is developed during required credit counseling, it must be filed with the court. After filing certain documents must be filed with the court and the trustee by your attorney. The case is automatically dismissed if these documents are not filed. Here is the checklist of needed documents.
A debtor cannot file under any Chapter if, during the prior 180 days, a prior bankruptcy petition was dismissed due to the debtor’s willful failure to appear before the court or comply with orders of the court or if the debtor voluntarily dismissed after creditors sought relief from the bankruptcy court to recover property upon which they hold liens. 11 U.S.C. §§ 109(g), 362(d) and (e).
Bankruptcy Budget Requirements
Chapter 13 Bankruptcy Plans & Modifications
The Louisville Kentucky Bankruptcy Court, often approves Chapter 13 bankruptcy plans that repay 10%, or less to unsecured debts. But your budget is important because the Bankruptcy court may increase your Chapter 13 payment if your income increases or shows you can afford to repay more. The Court requires you to file an annual budget. If your income falls you may also be able to lower plan payments by supplying a budget with a simple motion to modify the plan for a lower payment.
You can repay alimony, taxes, student loans and child support at the expense of unsecured creditors in a Chapter 13. You can eliminate a second mortgage in a Chapter 13 if there is no equity for the second mortgage. A Chapter 13 will discharge more types of debts than a Chapter 7. You can stretch out car or home mortgage payments, lower interest rates. Chapter 13’s are often more affordable have greater benefits, and cost less than debt settlement, but bankruptcy requires you to pay whatever disposable income you can based upon your budget into the plan.
Chapter 7 Budgets
You qualify for filing a Chapter 7 bankruptcy if your necessary and secured monthly expenses equals or exceeds your income. If your budget leaves nothing to repay creditors in a Chapter 13 bankruptcy you qualify for Chapter 7. Under the bankruptcy means test the US Trustee may challenge your Chapter 7 if he can show that you have sufficient disposable income to afford a Chapter 13 payment. But the US Trustee generally will not challenge a case filed originally as a Chapter 13 and later converted to a Chapter 7 after the debtor has made reasonable efforts to make it work and shows that his budget can no longer afford the Chapter 13.
You can click on this link to download an excel spread sheet to prepare your Chapter 13 or Chapter 7 budget. Remember you are allowed 401k contributions, 401k loan repayment, charitable, and private school deductions if you have a history of these past expenses. We have a list of often overlooked expenses. You may have to document large medical or other expenses that are unusually high but you may take them. School lunches vacations, taxes, kids school activities, repair and replacement of household goods, pet care, haircuts, grooming, and yard care are all necessary expenses that are often overlooked.