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ARE YOU TOO RICH FOR BANKRUPTCY PROTECTION UNDER THE NEW LAW?

CHAPTER 7

A new and much harsher bankruptcy law came into effect in October 2005, which made it harder to qualify for Chapter 7 (the cheap fast bankruptcy) if you were "rich".

Here are some rough guidelines on what "rich" means:

If your gross income (that is before taxes are deducted - much more than your take home) is larger than the median income (think of it as average income) for your state, you are assumed, temporarily, to be TOO RICH.

So what are the median gross income levels for New York? The numbers are always changing a little but as of 2007/2008 you are too rich for Chapter 7 bankruptcy if your recent average income is:

$43 000 p.a. in a one person home
$53 000 p.a. in a two person home
$63 000 p.a. in a three person home
$76 000 p.a. in a four person home.

....and so on (these are approximate rounded numbers - you really must check with your bankruptcy attorney on the exact numbers that apply to your family and area)

But all is not lost: Even if you are "richer" than the state median income you can still prove that - even at your "rich" income level - you still have nothing left because of your high living expenses: They don't give you too much discretion here - food, transport, housing are all IRS living standard numbers that you have to use. For a three person household with two cars and $55 000 gross income here are those numbers in the Hudson Valley area:

GENERAL EXPENSES (BASED ON BUREAU OF LABOR)

Food, Clothing etc:  $1000 per month
Transport operating (not car payment) costs 2 cars:$500 pm
Housing and Utilities (not mortgage payment) : $ 500

The above numbers are rounded and vary by area, income and family size. But it gives you an idea.

DEDUCTIONS FOR SECURED DEBT (DEBT WHERE THERE IS COLLATERAL BACKING THE LOAN)

The crucial deductions are for mortgage and car payments - you can use your actual payments: If yours are high then you are not so "rich" after all. So add up all your mortgage,. home equity, and car payments etc and deduct them in full as expenses. If you've fallen behind, add those arrears in too. A high mortgage and tax payment of $3500 pm, for example, can really help a "rich" household qualify.

OTHER IMPORTANT DEDUCTIONS

Income Tax and other payroll deductions
Marital Deduction: expenses for a non filing spouse only
Health Expenses, including health insurance, drugs...
Expenses for others in family - elders, babysitting,...
Pet, Smoking, term insurance, charitable deductions, school...

FINAL CONCLUSION

If all these expense deductions leave you with nothing each month, then you still qualify for Chapter 7. But if after all these deductions you have about $100 or more left to spend, then the new law says you should probably file under Chapter 13, and pay that $100 surplus to your creditors (again, this is approximate).

QUALIFICATION FOR CHAPTER 13

Basically Chapter 13 requires that you can make monthly payments of at least $100 on a plan to your creditors, and at the same time you must resume your normal mortgage and car payments. As a simple guideline this means paying 10% or so to your unsecured creditor bills over 60 months - typically $100 per month for 60 months on $60 000 credit card debt.

But if you owe taxes or arrears on your mortgage (if you are stopping a foreclosure, say, to save your house) you have to pay those taxes or arrears in full over 60 months. So if you are $30 000 behind on your mortgage, that will take a minimum of $500 per month over 60 months (or $30 000 total) to save the house.

There are other special situations where your monthly income has to be higher so you can make required higher monthly payments: If you have substantial net asset value, or a very high income surplus ....the trustee will require that you pay more to creditors. And if your debt is too high - say you have a $1mm mortgage - Chapter 13 is not for you.

BUSINESS

The above Chapter 7 "means test" using IRS guidelines don't apply to a person whose debt was principally derived from business expenses.

Chapter 11 is the standard bankruptcy for continuing a business whose problems are short term - there are no explicit income qualifications.  Chapter 12 is for family farm businesses - very rare.

CAUTION: Don't you dare use the above simplifications to make a final decision. They'll illustrate some key issues for you, but each household has its own complex situation. You may find you qualify for Chapter 7, but Chapter 7 won't save your house from foreclosure, and it may just lose you your house if that's all you look at.

The right decision for you can change depending on household size, area, income, joint or single filing, recent changes in income, tax witholdings, asset value, local practice ....please talk to an experienced bankruptcy attorney - most will give you a free initial consultation.