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 March 2010 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 numbers are approximate, as they are updated several times throughout the year. Your attorney will have the most recent figures available.
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: $1,000 per month
Transport operating (not car payment) costs 2 cars: $500 pm
Housing and Utilities (not mortgage payment): $500 pm
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…
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).
The typical process for a Chapter 7 case is as follows:
Come in to the office and speak with the attorney in a free consultation. After going over the particulars of your situation, the attorney will determine which chapter you should file.
File the petition. This is a lengthy document, which includes much information about your creditors and possessions.
A hearing 20 to 30 days later. No judge is present. You will appear in a meeting to answer questions with the bankruptcy trustee (typically an attorney) presiding. Your lawyer will be with you and creditors have the right to be present.
After your hearing, you enter a waiting period before your discharge is processed. During this time, any unfinished business relating to your hearing is completed, and you also must complete the second portion of the credit-counseling requirement, and file any reaffirmation agreements for secured loans you wish to continue paying.
The Discharge is 60 to 90 days later. If you filed Chapter 7, then all dischargeable debts are wiped out. If you filed Chapter 13, they are wiped out subject to your fulfillment of a repayment plan.
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 withholdings, asset value, local practice… please talk to an experienced bankruptcy attorney – most will give you a free initial consultation.
Bankruptcy is essentially the same as ever—the preference by society to give insolvents a “fresh start” rather than “debtors’ prison” or “debt slavery.”
A comprehensive set of federal laws passed in 2005 have brought changes–some favorable some not.
- Big increase in the protection of your house–a couple is now allowed more than $100,000 of equity in their house. This also means lower Chapter 13 payments to creditors.
- No luxury spending. If your income is better than half the population, you are only allowed IRS spending guidelines in showing your expenses. A special test is now used (Form 22) If a Chapter 7 “fails” this test, you may have to file a Chapter 13 and pay a minimum of ten cents on the dollar to your creditors.
- Documentation and proof, such as tax returns, pay stubs and property ownership documents, have become crucial.
- Special duties. You must complete Credit Counseling before and after filing (cost: around $50 per person, or $50 for a couple, which can be done by phone or internet and often takes an hour or less.) You must also state your intention to reaffirm secured debt such as a car loan or mortgage. This means promising to pay them in full. Whether you actually do so or rescind your promise is a decision you should carefully consider with your attorney.
- Repeated Chapter 13 filings–If there have been one or more bankruptcies in the prior year you may find a new Chapter 13 bankruptcy does not stop the foreclosure on your house.
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