To qualify for a Chapter 7 bankruptcy in Kentucky, a debtor must pass the means test. The means test has two parts. In the first part, you automatically qualify if your income is below the average income for your household and family size. In the second part, you can still 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 debt limits to a Chapter 13 but not to a Chapter 7 bankruptcy. Both corporations and individuals may file Chapter 7.  But only people who have less than 1.4 million in debt can file a Chapter 13.  By filing an individual Chapter 7 or 13 your business may not have to file a bankruptcy.

There are times when there is a purpose for Chapter 13 such as stopping foreclosures and catching up on a mortgage.  But you should not be talked into Chapter 13 just because the attorney will make more money from Chapter 13 than Chapter 7.   The reasons to file a Chapter 13 include

  1. you can only file one Chapter 7 every 8 years,
  2. high-income debtors are required to repay
  3. stopping student loan or income tax collections and abusive charges.

The Bankruptcy Means Test

Debtors who 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 then you automatically pass the means test and can file a Chapter 7 bankruptcy. These amounts adjust yearly. Below are the income for Kentucky. Each state and county have different average incomes. Your 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. By lowering your income temporarily such as filing while you are unemployed or on maternity leave you may qualify for a Chapter 7.

These amounts are the amounts which automatically qualify you for a Chapter 7.  They change often during the year. These are 2020 amounts and the amounts change quaterly.

State

1 person

2 person

3 person

4 person

5   Persons

Kentucky

$44,594

$56,257

$66,732

$80,115

$89,115

Indiana

$48,834

$62,931

$73,537

$87,636

$96,636

Exceptions to the 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 there is about $150 or less in disposable income left or if what is left pays back little to unsecured non-priority creditors.

The bankruptcy means test is only a presumption 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 Chapter 13 may not be feasible. You only need to explain a reason that allows you to file such as a recent retirement or sudden disability to overcome this presumption. Your income being seasonable may also be a very good reason to prove 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 95% of their clients file Chapter 13.  About 70% of the cases filed nationally are Chapter 7 cases.  Chapter 13 pays an attorney about three times the average Chapter 7 fee.  Make certain that Chapter 13 works for you, not your attorney.   Chapter 13 must be affordable and serve your goals. At the same time, bankruptcy requires debtors to file in good faith and uses their best efforts to repay. If the disposable income is there, the debtor must file a Chapter 13.

Qualifying for a Chapter 13

Only people can file Chapter 13.  Corporations cannot file a Chapter 13.  But people who have businesses often file Chapter 13 and include business debts which essentially allows their business to restructure. You can only file a Chapter 13 if the unsecured debt is less than $419,275 and secured debts are less than $1,257,850 in 2020. 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.

The Debtor is not allowed to make repeated mistakes

If you make a mistake and the case is dismissed the debtor can have a second chance by filing a second case.  But it gets harder every time to get the stay and get Chapter 13 plans approved.   If a Chapter 13 debtor filed a petition within the prior year the Debtor probably has to ask for the protection of the automatic stay. When a Chapter 13 debtor has filed two cases in the prior year there is no protection or automatic stay to stop a foreclosure or protect the debtor from collections.

Other regulations and limits

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. Certain documents must be provided to the court and 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 Benefits Plans & Modifications

The Louisville Kentucky Bankruptcy Court, often approves chapter 13 bankruptcy plans that repay 10%, or less to unsecured debts. Your budget is important because a bankruptcy court may increase your chapter 13 payment if your income increases or shows you can afford to repay more. The Louisville Bankruptcy Court requires you to file an annual budget if your plan is less than 100%. This is not required in the Eastern District or Southern Indiana District.  If your income falls you may 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 Chapter 13. You can eliminate a second mortgage in Chapter 13 if there is no equity for the second mortgage. Chapter 13 may discharge more types of debts than Chapter 7. You can stretch out car or home mortgage payments, and lower interest rates.

Chapter 13’s are often more affordable, have greater benefits, and cost less than debt settlement.  You also get the power of a federal judge’s court order.  Instead of begging the bank to accept settlement of 50% you can often force them to accept 10% if that is all your budget can afford.  A Chapter 13 Bankruptcy requires you to pay what disposable income you have based upon your budget.  That plan may even repay zero to unsecured debts.

Chapter 7 Budgets

You qualify for filing a Chapter 7 bankruptcy if your necessary and secured monthly expenses approximately equals or exceeds your income.  If your budget leaves very little or 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 for a disabled child 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.

Means test qualifying for a Kentucky Chapter 7 by Nick Thompson

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