To qualify for a Chapter 7 bankruptcy in Kentucky, a debtor must pass the “means test.” To begin, 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 qualify if your reasonable and allowable expense deductions 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. Please note that there are debt limits to a Chapter 13 but not to a Chapter 7 bankruptcy.
Also, 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 might 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 makes more money from Chapter 13 than Chapter 7. To clarify, the reasons to file Chapter 13 include the following:
- You may only file one Chapter 7 every 8 years
- High-income debtors are required to repay
- You need to stop student loan or income tax collections and abusive charges
The Bankruptcy “Means Test”
First, please note that debtors with predominately business debts do not have to pass the means test to file Chapter 7. Now, on to the bankruptcy means test which 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 file a Chapter 7 bankruptcy. Also, note that these amounts adjust yearly. As an example, in the table below is the income for Kentucky. However, each state and county have different average incomes. However, your income determination is from 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 might qualify for a Chapter 7.
These amounts are the amounts which automatically qualify you for a Chapter 7. However, they change often during the year. For your reference, these are 2020 amounts with the amounts changing quarterly.
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 file Chapter 13 whereas corporations do not file Chapter 13. But, people with businesses often file Chapter 13 while including business debts which essentially allows their business to restructure. However, you can only file a Chapter 13 if the unsecured debt is less than $419,275 and the secure debts are less than $1,257,850 in 2020. 11 U.S.C. § 109(e). However, these amounts adjust annually by the consumer price index. Corporations only file Chapter 7 or Chapter 11.
It is Not Allowable for the Debtor to Make Repeat Mistakes
If you make a mistake and the case is dismissed, the debtor might get a second chance by filing a second case. However, it gets harder every time to get the stay and get Chapter 13 plan approval. If a Chapter 13 debtor files a petition within the prior year, the debtor probably has to ask for the protection of the automatic stay. When a Chapter 13 debtor files 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 you miss the payment deadline. Also, paying a fee in installments draws too much attention to your case.
No individual may file under any chapter of the Bankruptcy Code unless he or she, within 180 days before filing, completes credit counseling. 11 U.S.C. §§ 109, 111. Also, if a debt management plan develops during credit counseling, you must file it with the court. Additionally, your attorney must provide certain documents to the court and trustee. However, if this filing does not take place, the case is automatically dismissed. Here is the checklist of the right 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 might increase your Chapter 13 payment if your income increases or shows you can afford to repay more. Additionally, the Louisville Bankruptcy Court requires you to file an annual budget if your plan is less than 100%. However, this is not a requirement in the Eastern District of Southern Indiana District. If your income falls you might 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 Chapter 13. You might also eliminate the second mortgage in Chapter 13 if there is no equity for the second mortgage. Interestingly, Chapter 13 may discharge more types of debts than Chapter 7. In addition, you can stretch out car or home mortgage payments, and lower interest rates.
Filing a Chapter 13 is often more affordable, has greater benefits, and costs less than debt settlement. You also get the power of a federal judge’s court order. So, instead of begging the bank to accept a 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. In fact, 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 equal or exceed your income. However, 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 shows that you have sufficient disposable income to afford a Chapter 13 payment. But the US Trustee generally doesn’t challenge a case filed originally as a Chapter 13 with later conversion to a Chapter 7. But, to be clear, this happens only after the debtor makes reasonable efforts to make it work and shows that his budget no longer can afford the Chapter 13.
We also recommend that you click on this link to download an excel spreadsheet to prepare your Chapter 13 or Chapter 7 budget. Remember, you are allowed 401k contributions, 401k loan repayment, charitable. These also include private school deductions for a child with a disability if you have a history of these past expenses. To help you out, here is a list of often-overlooked expenses. You might also have to document medical or other expenses that are unusually high. School lunches vacations, taxes, kids’ school activities, repair and replacement of household goods, pet care, haircuts, grooming, and yard care are also necessary expenses that many often overlook.
Means test qualifying for a Kentucky Chapter 7 by Nick Thompson.