Most people need to discharge unsecured debt quickly and get back to work. Chapter 7 is quicker and less expensive than filing a Chapter 13. Something horrible like a lost job, death in a family, or divorce is often the cause of Bankruptcy. Over 95% of the people we see qualify for Chapter 7. But you can only file one Chapter 7 every eight years from the date the first case was filed until filing the following Chapter 7 case. If you know the rules, you will be able to make sure you qualify for Chapter 7, and you don’t have to spend three to five years repaying all your disposable income in Chapter 13.
How to Qualify for Chapter 7 Bankruptcy
About 97% of Americans qualify for Chapter 7. But attorneys are paid 3 to 4 times more for Chapter 13 cases. If you time your bankruptcy, increase the reasonable expenses and decrease the prior six months of income, it usually is easy to qualify. To avoid filing Chapter 13, you need to know why some people are forced to file Chapter 13.
⎆ No money down Chapter 7 cases are now possible.
One of the problems with filing a Chapter 7 is the upfront cost. The minute you file Chapter 7, all of the debts you had before filing become uncollectible. This includes your attorney fees. So if the attorney does the work on your case before filing, he can’t collect after you file. Doing that is a violation of the stay and an ethics violation. If the attorney only files a skeleton four-page petition initially and does the work after the case is filed, the debtor can finance the bankruptcy. That is how a zero-no-money-down bankruptcy works. To do a no money down Chapter 7, you file a skeleton petition and have your attorney prepare the remaining schedules after filing. Since the work is done post-petition, you can then pay him post-petition over time. So why are most clients told they have to file as a Chapter 13?
⎆ No money down Chapter 7 cases allow immediate filings.
Some people cannot pay the attorney fees upfront. If one or two creditors have garnished you, you may not have the funds. Attorney fees nationwide went to 1400 for a single and 1600 for a joint petition plus the filing fees in 2021 which are 338.00. If your net monthly income is under $3000, how do you file? Since 2019 you can now finance your attorney fees and start your cases with no money down. Financing it over time does cost more than paying cash upfront but financing allows you to hire a better attorney.
⎆ Reasons to consider avoiding Chapter 13.
Attorneys are paid far more for Chapter 13 (about $4,000) than they are for Chapter 7. Because of this, some offices make certain most of their clients are placed in Chapter 13. When you do the means test, you automatically qualify for a Chapter 7 if your income is less than the average income for your family size. Even if your income is above average, you can also qualify if you have no significant excess income after deducting reasonable and necessary expenses. This page has the average amounts for your budget in 2020.
We review your expenses in our office for allowed expenses and include costs people often forget. Some attorneys may disallow 401k retirement expenses but we deduct reasonable deductions for retirement. There are often-overlooked expenses, which may help you qualify for chapter 13. This can include private school expenses for a disabled child and other costs.
⎆ Why do you have to review the expenses?
We review your net income and deductions for these necessary and reasonable expenses such as your daycare, mortgage, and car payments. If there is significant money left over, you may have to file as a 13 and repay something in Chapter 13.
If the expenses are left out your plan becomes too expensive or it won’t work. In other cases, if a lawyer leaves out expenses, you may be forced into Chapter 13, although you can’t afford a Chapter 13. Here are the US Trustee median income guides for each family size in 2020 and later. A single person can make over 44,500 in 2021 and automatically pass.
It may be months or years before some expenses like a replacement vehicle happen. But a furnace replacement and other items need to be in the budget if they are definite and foreseeable. Some people replace an auto before filing, so less is paid to creditors in Chapter 13, or nothing is paid back in Chapter 7. A furnace, car, or tax repayment can be in your budget.
A quality attorney understands these needs and plans for them in the budget so you can qualify and file as a Chapter 7. High medical expenses like $800 per month in diabetic medications are just one example of a high reasonable or necessary expense. Daycare must also be included in the budget. The judges and trustees generally trust clients, but they ask for verification of significant expenses.
⎆ Timing your Chapter 7 bankruptcy every eight years.
You can only file one Chapter 7 bankruptcy every eight years. This is calculated from the date the first case is filed until the second filing date. You can file a Chapter 13 immediately after Chapter 7 to catch up on your foreclosure or for other valid reasons. But you only get a discharge in Chapter 7 or 13 by waiting any required amount of time. The type of chapter you want to file, what you filed before, and how much Chapter 13 pays back dramatically change how long you have to wait. Filing one Chapter 7 after a prior Chapter 7 is eight years and the longest period you will have to wait.
In some cases, you may not need the discharge of Chapter 13. Chapter 13 cases that only need to catch up with a mortgage or manage student loans or tax debts might not require a permanent discharge or have a waiting period. If you are filing a Chapter 13 to catch up on a foreclosure or manage student loan debts, you may have no waiting period or need for a discharge.
⎆ Reasons for Chapter 13 or 7.
There are valid reasons for Chapter 13. First, only Chapter 13 allows you the time you might need to catch up on a mortgage. Next, only Chapter 13 will enable you to avoid repaying student loans for up to five years. Chapter 13 also protects you from IRS debts and gives you up to five years to repay priority or secured portions of an income tax debt and repay the unsecured amount of the debt at 10% or less.
You are allowed to keep a minor amount of equity in a home. Each person on the deed can keep over $25,000 in equity under the 2021 Federal exemptions. Each year, this amount changes and each state chooses whether to use the federal exemptions or its state exemptions. Kentucky uses federal exemptions, while Indiana has lower state exemptions. You can keep $4,000 in an auto and about $17,000 in household goods in Kentucky and file a Chapter 7.
⎆ You don’t have to lose property.
People who own more than $25,000 for home equity per person on the deed do not have to lose their homes in Kentucky. If they have only 5,000 or 10,000 too much equity, the trustee will not usually bother with administering such a small estate which would have little benefit for the creditors. Homes are valued at the PVA or liquidation value.
If you have $75,000 too much equity in their home, then a Chapter 13 needs to repay $75,000. You are only at risk of losing property when you have substantially excess equity in Chapter 7. A Chapter 7 trustee may force you to remain in Chapter 7 to force a sale. You are not required to stay in Chapter 13 if the case becomes a problem. Chapter 13 is always the safe option if you believe you may have too much equity. A Chapter 7 trustee is paid a percentage of what is repaid to creditors. A Chapter 7 Trustee has his selfish reasons for keeping you in the case and selling your property if there have been fraudulent transfers or there is too much equity.
⎆ The totality of the circumstances test in Chapter 7.
Even if you pass the means test, you can still be forced into Chapter 13 if all the circumstances show you can repay a significant amount in a 13.
Imagine Jimmy, a 21-year-old who runs up $50,000 in credit card debt. He makes $40,000 per year. Jimmy lives at home with mom. He walks next door to work. Jimmy has no car expenses, no apartment. He makes less than the average household of one, which is $45,000. Why won’t Jimmy automatically pass the means test? Because he has zero expenses. Surely, Jimmy can repay something, and even a $200 per month payment would provide a significant repayment in Chapter 13. He might have been better off if he moved into an apartment and bought a car before filing. However, the totality of the circumstances demands he file as a 13.
⎆ The totality of the circumstances test and future income
The same problem happens to someone laid off for the prior six months and is now back to work at his $100,000 job for a family of two. The means test uses the average of his previous six months of income. Being laid off for a month or two may lower your prior six months of income enough to pass the means test.
But if you file bankruptcy just before you accept a $150,000 promotion you have probably waited too late to file. The courts look into the future as well as the prior six months.
Because your income drops, it may allow you to file as Chapter 7. But, if it is obvious this is just temporary, the court will look at all the factors to determine whether filing as a Chapter 7 is an abuse. So how can you know to a certainty whether you can file as a Chapter 7?
⎆ Planning your Chapter 7 bankruptcy.
Although the bankruptcy system is designed to catch fraud, there is nothing wrong with properly planning a bankruptcy. You should file a Chapter 7 when you have a low income and have little or no assets. You can plan a bankruptcy to take the maximum amount you can use in exemptions. An experienced attorney plans your exemptions to keep the property. He looks over your budget to make sure any Chapter 13 plan is affordable, and every Chapter 7 has eliminated unwanted and unnecessary debts. The purpose of bankruptcy is so you can have a fresh start on a budget you can afford.
An example of proper planning is when you have an asset and then change it into a different asset or spend down the asset before filing. For instance, you may have $10,000 in your bank account and own a 1995 jeep only worth $4,000. If you spend $10,000 on a new motor, transmission, tires, and winch on the jeep, the jeep is still only worth $4,000. But you don’t have to turn over the $10,000 to the trustee. Another example is maintenance and repairs on your home and medical procedures. Spending cash or selling an auto to pay for a house repair is not a fraudulent transaction. And the repair does not increase the appraised value of the home.
You only file a Chapter 13 when you have to in order to control certain types of debts. The mortgage payments get caught up in Chapter 13. Or, a Chapter 13 can repay the car and any priority taxes, which a Debtor must repay. Often Chapter 13 only repays debts you would have repaid anyway. But by filing a Chapter 13 debtors often repay far less in penalties and interest which in the long run results in savings.
⎆ Avoiding fraudulent and preferential transfers.
Over-paying or giving a lien to a secured creditor just before filing is often an example of a preferential transfer. Creditor garnishments are another example of a preferential transfer because the creditor got more than he would have received under Chapter 7. Preferential transfers and fraudulent transfers are often confusing because they are so similar. You can often recover garnishments in Chapter 7.
You can wait a period of time. Then a transfer for less than the full value is not fraudulent. This lookback period is 1-2 years in bankruptcy court, and in Kentucky state court, it is five years.
It isn’t illegal or improper to plan your bankruptcy to keep the property, but you need to ensure you do not make any fraudulent transfers just before filing. Fraudulent transfers may or may not be to friends and family. If you sell your new Mercedes worth $50,000 to your mother for $1,000 before filing bankruptcy, it is a fraudulent transfer. If you have questions about how to file a Chapter 7, be sure to contact us at 502-625-0905 today.
If you need to file bankruptcy, don’t delay because timing is crucial. I am here to help you. So, contact my office right away to start the conversation. Nick C. Thompson, Bankruptcy Lawyer: 502-625-0905.