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How to Qualify for Chapter 7 Bankruptcy- Explained in Video

how to qualify for chapter 7 bankruptcy

Most people need to discharge unsecured debt quickly and get back to work. Chapter 7 bankruptcy is easier, quicker, and less expensive than filing a Chapter 13. Something horrible like a lost job, death in a family, disability or divorce is often the cause of debt.  Bankruptcy is the ultimate cure for debt.

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 the following Chapter 7 case is filed. If you know the rules, you will be able to make sure you qualify for Chapter 7 bankruptcy, and you don’t have to spend three to five years repaying all your disposable income in Chapter 13.  These rules tend to revolve around not having the income to fund a chapter 13 and not having too much equity in property.  

Conditions to Qualify for Chapter 7

When was the last time you increased your net worth from 20,000 to 50,000 within 8 hours and 45 days? While you increase your net worth, you also increase your credit score.  That is exactly what most Chapter 7 cases do.  Probably never.

You probably never made so much money in so short a time for so little you invested.  The attorney fee runs about 1400 for a single person and 1600 for a couple in 2022 plus the filing fee.  The perfect conditions for a Chapter 7 occur when you have a large amount of unsecured debt and little to no income and assets. Over 99% of people never lose any assets. You can keep over 28,900 equity in your home using federal exemptions.

How to Qualify for Chapter 7 Bankruptcy

About 97% of Americans qualify for Chapter 7 bankruptcy. 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 average monthly 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 for Chapter 7 bankruptcy, your pre-petition debts become uncollectible. This includes any attorney fees for work which is done pre-petition.   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.  His fees are no different than a credit card debt and are discharged at the end of a Chapter 7 case.  

If the attorney only files a skeleton four-page petition initially and does the majority of the work after the case is filed, the debtor can often finance the bankruptcy.  That is how a zero-no-money-down bankruptcy works. The judges in the Eastern District of Kentucky allow this.  In the Western district of Kentucky they don’t. 

To do a no money down Chapter 7 bankruptcy, 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?

Reasons to Consider Avoiding Chapter 13

Attorneys are paid far more for Chapter 13 than Chapter 7 (about 4000-4500). Because of this, some law offices ensure most of their clients are placed in Chapter 13. You automatically qualify for a Chapter 7 bankruptcy if your current monthly income is less than the average monthly income for your family size. Even if your current monthly income is above average, you can qualify if you have no significant excess gross income after deducting reasonable and necessary monthly expenses. This page has the average amounts for your budget in 2020.  For the up to the date qualifying amounts in Kentucky call our office. 

We review your monthly expenses in our office for allowed expenses and include costs other law offices often forget. Some attorneys may disallow 401k retirement expenses, but we expense any 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 current monthly income and deductions for these necessary and reasonable expenses, such as your daycare, mortgage, and car payments. If significant money is left over, you may have to file as Chapter 13 and repay something.  But repaying zero is probably better if you can qualify for it. 

If the expenses are left out, a Chapter 13 plan may become too expensive or won’t work. If a bankruptcy lawyer leaves out expenses, you may be forced into Chapter 13, although you can’t afford a Chapter 13.  Here is the most up to date US Trustee median income guides for each family in 2020 and later. A single person can make over 44,500 in 2021 and automatically pass.  A family of 5 is over 100,000.   These amounts are constantly increasing.  

Include and Document Future Expenses in Your Budget

It may be months or years before you incur some monthly expenses like a replacement vehicle. But a furnace replacement and other items must 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 made a part of your budget so you don’t have to do without necessary items later.

A quality attorney understands these needs and plans 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. Any required daycare must also be included in the budget. The bankruptcy judge and trustees generally trust clients but ask for expense verification if items are expensive and above normal.

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 of filing the first case 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 a chapter 13 pays back dramatically changes how long you have to wait. Filing one Chapter 7 after a prior Chapter 7 is eight years and the most extended 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. 

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. A Chapter 13 does stop or stays collection for the 5 years period.  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 and 28,900 in 2022. This amount changes yearly, and each state chooses whether to use the federal or state exemptions. Kentucky uses federal exemptions, while Indiana has lower state exemptions. You can keep $4,000 in equity 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 $28,900 in home equity per person on the deed do not have to lose their homes in Kentucky. Suppose they have only 5,000 or 10,000 too much equity. In that case, the trustee will not usually bother with administering such a small estate which would have little benefit for the secured and unsecured creditors. Homes are valued at the PVA or liquidation value not the zillow value.

If you have $75,000 too much equity in your home, then a Chapter 13 needs to repay $75,000 if you want to keep a home. 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 and 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 secured and unsecured creditors. A Chapter 7 Trustee has selfish reasons for keeping you in the case and selling your property if there have been fraudulent transfers or if there is too much equity.

The Totality of the Circumstances Test in Chapter 7

Even if you pass the means test and receive credit counseling from an approved credit counseling agency, you can still be forced into Chapter 13 if all the circumstances show you can repay a significant amount in 13.

Imagine Jimmy, a 21-year-old who runs up $50,000 in credit card debt. He makes $40,000 per year and lives at home with his mom. The 21 year old walks next door to work and has no car expenses and no apartment rent. He makes less than the average income for a household of one, which is $45,000. Why won’t Jimmy be allowed to file a Chapter 7.  He passes the means test.  Because he has zero expenses. Indeed, Jimmy can repay something; even a $200 per month payment would provide a significant repayment in Chapter 13. He might have been better off if he had moved into an apartment and bought a car before filing. The totality of the circumstances demands he must file as a 13 because he has an easy ability to repay.

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 gross 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 accepting a $150,000 promotion, you probably have waited too late to file. The bankruptcy court looks into the future and the prior six months against the median income.

If your current monthly income drops, it may allow you to file as Chapter 7. But, if it is obvious this is just temporary, the bankruptcy court will look at all the factors to determine whether filing as a Chapter 7 is an abuse. So how can you know whether you can file as a Chapter 7?

Planning your Chapter 7 Bankruptcy Process

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 ensure any Chapter 13 plan is affordable and that every Chapter 7 has eliminated unwanted and unnecessary debts. The purpose of bankruptcy is to have a fresh start on a budget you can afford.

An Example of Proper Planning

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 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, or strip a second mortgage which in the long run can result in savings.

Avoiding Fraudulent and Preferential Transfers

Over-paying or giving a lien to a secured creditor just before filing is 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 or 13.  Transfers within 90 days are recoverable.  

You can wait a period. Then a transfer for less than the total 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 must ensure you do not make any fraudulent transfers before filing. Fraudulent transfers may or may not be to friends and family. It is a fraudulent transfer if you sell your new Mercedes worth $50,000 for $1,000 before filing bankruptcy whether it is to your mother or a stranger.  However it is a little more obvious when your girlfriend got the auto. If you have questions about how to file a Chapter 7, be sure to contact us at 502-625-0905 today.

 

The 5 Requirements to Qualify for Chapter 7 Bankruptcy the Checklist

1. The Waiting Periods

First, you must wait a period since filing your last Chapter 7 or Chapter 13. If you last filed a Chapter 7, you must wait eight years after filing the last case before filing a new case. 

2. The Means Test and Net Income Requirements

Second, your current monthly income must be below the average for your size family, or if your income is above average, your budget must have no disposable income. About 95% or more of Americans qualify. However, it isn’t enough to pass the means test and receive credit counseling if you have disposable income. If you have a lavish lifestyle, you are still a Chapter 13. Most families of 5 will still qualify in 2022 if they make 90,000 and have a regular mortgage payment.

3. Non-Exempt Property

Third, You must not have an excessive amount of property. You can keep 4,000 of equity in an auto but not 25,000. If you have little or no equity in your home, you can combine exemptions to keep more property if you have less equity in real estate. For an auto, you can keep up to about 19,000 in an auto. See our page on what the federal exemptions allow you to keep. About half the states use the federal exemptions. The other half use their state exemptions.

4. Fraudulent Transfers and Preferential Transfers

Fourth you must not have given away property within the last two years for less than its fair market value. Giving away property creates a fraudulent transfer or preferential transfer. Give away a house or your expensive car to Mom just before filing, and the Trustee can sue her and takes away the car as a fraudulent transfer. If a creditor garnishes your bank account, he takes a preferential transfer if it was over 600 dollars in our district.  Amounts over 600 can be recovered.

5. Having the Proper Debts

Chapter 7 works best if you have a high amount of unsecured debt. That is what it was designed to do. If your debt is primarily a home that is in foreclosure and your goal is to cure a foreclosure, then you should file a Chapter 13. The same holds for income taxes less than three years old and priority debt. When you owe student loan debt and want to stop a lawsuit or garnishment, you probably want to file a Chapter 13 for debt relief.

Chapter 7 only lasts for four months. If you have priority income taxes, foreclosure, or student loans, you still have those problems after the four months it takes to discharge a Chapter 7. You can file a Chapter 7 first and discharge the unsecured debts. Then you have no unsecured debts to repay in Chapter 13. This can make a Chapter 13 much cheaper.  People often talk about this as a Chapter 20 because two cases were filed to make the Chapter 13 plan far less. 

You can file a Chapter 13 after Chapter 7 to manage foreclosures, taxes, or student loan debt. You may not have waited long enough to get a second discharge. But if you just got a discharge last month in Chapter 7, you probably don’t need another one.

When to Stop Using Credit Cards Before Filing Chapter 7 Bankruptcy?

You want to stop using credit cards about 90 days before filing a Chapter 7 because a section of the code claims that debts charged within 90 days before filing bankruptcy are presumed fraudulent. It is improper to charge knowing you are filing. 

But it is infrequent for a creditor to object, and the penalty is that you would remain liable for that debt. You occasionally see a client who charges up a credit card or payday loan to file a bankruptcy. It is rare for these debts to file an adversary to get the money back.  

Assets Considered in Chapter 7 Bankruptcy

The assets in bankruptcy include anything you have a right to. This includes personal injury lawsuits and any inheritance you get within six months after filing.

Hire a Bankruptcy Attorney to Get Professional Assistance!

I would not consider using just any attorney for filing my bankruptcy. I used to get amused when younger attorneys called me and asked how to strip a judicial lien or if they had some other problem. Some of them did this while their client was beside them, and while I was looking at their clients’ faces. 

Some problems in bankruptcy cannot be fixed after you make a mistake. Be sure to hire someone with experience and one trusted by former clients, even if it costs $200 more. 

Resources for Bankruptcy

Louisville, Kentucky Bankruptcy Forms

How to Win Great Chapter 13 Plan Payments • Video

Filing Chapter 7 & Chapter 13 Bankruptcy

Means Test Qualifying for a Kentucky Chapter 7

How to Get an Affordable Chapter 13 Budget • Video

If you need to file bankruptcy, don’t delay because timing is crucial. I  am here to help you. So, contact my office immediately to start the conversation with Nick C. Thompson, Bankruptcy Lawyer: 502-625-0905.

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