by Steven A. Leahy
Being able to Qualify for Chapter 7 bankruptcy is a misnomer. Everyone can file a Chapter 7 bankruptcy – but not everyone who files will receive a discharge of their debts. Back in 2005 Congress changed the bankruptcy laws to include a means test. The means test looks at a family’s gross income and compares it to the “average” income of a family of the same size. If that family’s income is higher than the mean income, it is presumed that is would be abusive for that person to receive a discharge under Chapter 7 of the bankruptcy code.
Instead, the code anticipates that a Chapter 13 would be more appropriate for over the mean debtors. Under Chapter 13, an over the mean Debtor is required to dedicate their disposable income, as determined by Bankruptcy Form 22C, for 60 months (5 years). Only after completing the plan can that debtor receive a discharge of their debts. Most Debtors favor Chapter 7 over Chapter 13.
Simply looking at a person’s gross income and comparing that number to the mean is only the surface analysis. If this surface analysis indicates that the family’s income is over the mean, it is only a presumption that a Chapter 7 would be abusive. The presumption can be overcome by showing that the Debtor’s disposable income will not allow creditors to receive any meaningful pay out in a Chapter 13 plan.
The more detailed analysis begins with Bankruptcy Form 22A. Debtors are to report all income, from whatever source, for the previous six (6) months. The income is annualized and then averaged over twelve (12) months. The next step is to determine monthly expenses and deduct those expenses from the average monthly income.
Many of the allowable expenses are determined from IRS standards, rather than actual expenses. For example, housing expenses are determined by where the Debtor lives and how many people live in the house. Transportation expenses are determined by the age of the vehicles, and if a vehicle is financed.
Next, actual taxes and payroll deductions are subtracted. Deductions for federal income tax, state income taxes, social security tax, Medicare tax, union dues, and mandatory pension contributions, are common deductions. The next deductions look to health insurance and life insurance contributions.
Finally, secured debt is deducted. This is the often overlooked deduction that allows over the mean debtors to overcome the presumption of abuse. The first section of secured debt includes a home mortgage, car payments and other secured debt (e.g. 2nd mortgages, house improvement payments, etc.). The last numbers, and often a large number, concern arrears in home mortgage payments. The longer a family is behind in mortgage payments, the greater the arrears used to overcome the presumption of abuse.
Interpretation of Bankruptcy Laws can vary according to district. So, if you are in foreclosure or considering bankruptcy, make sure you consult with a local attorney who will complete a comprehensive investigation of your case – not just a surface analysis. Before you do anything, you should give me a call. We can discuss your options to see if you can overcome the presumption of abuse and qualify for Chapter 7 bankruptcy. – Opem Tax Resolutions & The Law Office of Steven A. Leahy, PC (312) 664-6649. Call NOW to set up your FREE Consultation.