Do I Qualify For a Chapter 7 Bankruptcy or a Chapter 13 Bankruptcy Debt Consolidation Plan?

Personal bankruptcy law is often misunderstood. People frequently think they can file Chapter 7 bankruptcy and use the Chapter 7 bankruptcy laws to wipe out debts no matter what. People who are trying to control debts that cannot be discharged, such as recent priority taxes, student loans, child or spousal support arrears, or trying to cure past due mortgage obligations, often file a Chapter 13 debt consolidation plan without regard to whether the Chapter 13 reorganization has a realistic potential of success.

Problems with Chapter 7 personal bankruptcy cases are often compounded by legal advice from bankruptcy lawyers that are either not knowledgeable in personal bankruptcy or are less candid about what the likelihood is that your personal bankruptcy case will be challenged. Being forced to defend your Chapter 7 bankruptcy or having to convert to a Chapter 13 debt consolidation plan can cost you substantial additional bankruptcy lawyer’s fees. Keep in mind that the more problems you have with your personal bankruptcy, the more money the bankruptcy lawyer is going to make off you.

The reality about personal bankruptcy and how the bankruptcy law works is that many people do not have a choice about which type of bankruptcy they file.

If you file Chapter 7 personal bankruptcy when you have income that, after reasonable living expenses, is sufficient to pay a significant portion of your unsecured non-priority debt over 3 years, the United States Bankruptcy Trustee will file a bad faith objection to deny your Chapter 7 bankruptcy discharge. Section 707(b) of the bankruptcy code holds that it is bad faith for you to file Chapter 7 personal bankruptcy when you really don’t need it. Bankruptcy law does not allow you to discharge your debts simply because you want to. You have to prove that you really need the discharge and not simply filing to eliminate debts that you could pay a significant portion of in a Chapter 13 debt consolidation / reorganization plan. Chapter 7 personal bankruptcy is not a get out of debt free card.

If you file a Chapter 13 debt consolidation / reorganization plan (to stop foreclosure or control taxes for example) if you do not have enough income in excess of your reasonable living expenses to make plan payments, the Chapter 13 Trustee will file a motion to dismiss your Chapter 13 debt consolidation / reorganization plan because the Chapter 13 plan is not feasible. Even if there is some additional income above your reasonable living expenses, if it is not enough to pay the debts that are proposed, the Chapter 13 debt consolidation plan will not be approved by the court. Ironically, filing a plan to pay your creditors eveything you owe them can be determined to have been filed in bad faith when the plan clearly was not supportable.

There are times when a Chapter 13 debt consolidation plan can be partly supported by sale or refinancing of a home or other property, or a legitimate plan for increased payments later where it is clear that they will have more income to support the raise in payments. Those situations are often very complex and should never be attempted without the guidance of a highly trained bankruptcy attorney (preferably one who specializes in personal and small business bankruptcy).

To be able to determine whether a bankruptcy court or bankruptcy trustee is going to challenge your bankruptcy filing will depend on the combination of 3 factors. They are: (1) the net monthly household income; (2) the reasonable living expenses for the household; and (3) the amount and nature of the debts you have. Having accurate net income information then deducting reasonable monthly expenses will determine your net disposable income. It is then that the trustee (or your attorney) will be able to compare that net disposable income to your actual debts to determine what form of bankruptcy you are legally entitled to file.

It is extremely important that you know what your “net disposable income” is so you can tell which type of bankruptcy you are going to be able to file before you even see the bankruptcy attorney.

In order to help you do that, I have designed a household income calculator so you will be able to know what your monthly income (including a spouse’s income) is after taking into account how often you get paid and what deductions there are.

When determining what your income is for bankruptcy purposes to see if a filing is a “good faith” filing the trustee will look at what voluntary deductions are being taken out of both your paycheck and your spouse’s paycheck if you are married and not separated. This information is necessary even if your spouse is not going to file with you. Examples of these “voluntary deductions” include payments on debts that are taken out of the paycheck such as loan payments on retirement loans, employer loans, car payments and credit card debts. Other items considered as voluntary deductions include voluntary retirement payments and 401(k) deductions.

Things that are not considered as voluntary deductions include regular income taxes, social security, regular child or spousal support payments, life and health insurance, required union or professional dues.

A Chapter 7 Trustee will take your monthly income and add back in the amounts of the voluntary deductions back in to determine your total net household income. You will be able to make the same determination before you ever file a bankruptcy.

The second part of this is of course determining what your reasonable living expenses are. I have designed a household expense calculator to help you make that determination. This calculator is similar but not the same as the expense schedule in a bankruptcy case. The difference is that the household expense calculator on our web site has a number of categories of expenses that are not found on the bankruptcy schedules. While the additional expenses may not be on the bankruptcy form, they are expenses that people often forget to list and calculate but may well be legitimate expenses that may be put under the “other expenses” portion of the bankruptcy form.

Even if you do not file a bankruptcy, these income and expense calculators are extremely useful budgeting tools to help you find out where the money is going each month and why you are having problems paying bills. If you haven’t put together a budget now is a great time to start.

Both the household income calculator and the household expense calculator here on our California Bankruptcy Attorneys web site are printable documents so that you can have a working copy of both when you see a qualified bankruptcy attorney.

California Bankruptcy Attorneys offers you free phone or in office bankruptcy attorney consultation if you either live in the state of California or if the majority of value of your assets are in California. See how our Online Bankruptcy Law Office can save you money while we give you absolutely the best bankruptcy law services.