Whether to file a Chapter 7, 13, or 20?

Whether to file a Chapter 7, 13, or 20?

When filing a Chapter 7 and 13 you must:

1. Reside, be domiciled, or have property or a place of business in the United States (U.S.). A person does not have to be a U.S. citizen to file, nor live in the U.S., if they have assets in the U.S.
2. You can file if you do not have a prior Chapter 7 discharge or it has been more than 8 years, or 6 years since a Chapter 13 discharge.
3. Within 180 days before filing the bankruptcy petition, you must receive credit counseling briefing from one of the approved nonprofit agency that focuses on budget and counseling.
4. Be subject to a means test to determine how your income compares to Arizona’s median income and whether you qualify to file under Chapter 7.

If your current monthly household income is less than the Arizona median income for a household of your size the assumption is that you pass the means test and are eligible to file a Chapter 7 bankruptcy.

If your income is more than the Arizona median, you will have to take a means test to verify if you are entitled to a discharge under Chapter 7. This determining if you can make payments for unsecured debts which would then convert your petition into a Chapter 13 bankruptcy filing.

Means Test

Exemptions in having to be evaluated by the means test. If for example your debts are not solely consumer debts then you are exempt from the means test. If you are a disabled veteran who incurred the debt while on active duty or performing a homeland defense activity you are exempt.

The means test was established to calculate whether you have the financial means to pay back a considerable amount of your debt via a payment plan in a Chapter 13. The test considers income and admissible expenses. If the results show you have sufficient net monthly income to pay your debt, you cannot file a Chapter 7.

The means test needs the following to compute the results:

1. Information regarding income for the past 6 months. This being other contributions from others not only wages.
2. All expenses, including secured debt such as a home, vehicle, furniture, etc.
3. Total amount of debt.
4. Current Monthly Income: money received during the applicable six months prior to filing. Income including:
   • Rental and other property income
   • Pension and Retirement income, domestic support (Child Support), Interest and dividend income.
   • Gross income from operation of a business
   • Contributions from others, for example food support, unemployment compensation, etc.

Current Monthly Income or (CMI) includes gross income including yours and a non-filing spouse and assistance from family members, but does not include Social Security.

Example of a Means Test

“If you earned $12,000 per month from January through March and then were employed from April through June, your CMI as of July 1 would be $6,000 per month. The law states that if your CMI is less than the Census Bureau’s median income, according to family size in the state in which you have residence, then you have automatically passed the means test, and you are eligible to file Chapter 7 bankruptcy (LawReviewCle, 2012).”

The formula also calculates your Net Monthly Income by deducting your expenses from your current monthly income, presumably used to pay off your debt. Expenses including rent, food, housekeeping supplies, etc. are deducted but other expenses as well. Other expenses being:

• Child Care
• Tax Withholding
• Medical and dental expenses including medical insurance for family
• Term Life Premiums
• Private school tuition up to $125 per month per child
• Alimony, child support, and other court order payments
• Care if elderly or disabled dependents
• Health Savings Account

Failing the Means Test

Failing the test makes you ineligible to file a Chapter 7 and leads to a “presumption of abuse”. However, there are possibilities to overcoming the presumption. Possibilities being: job loss, pay cut, a serious medical condition, or unordinarily high child care expenses. You must show that these expenses being acquired are reasonable and you have no alternative other than filing for bankruptcy.

Passing the Means Test

Passing the means test makes you eligible to file a Chapter 7 but that does not mean the means test is not the only test applicable to Chapter 7 eligibility. The second test being if the United States Trustee believes that the filing was done under bad faith or is abusing the ability to file for bankruptcy.

Totality of Circumstances Test

This test considers all financial and familial circumstances. If it appears that you could repay your unsecured debts a Court could dismiss your case because of abuse. This test differs from the means test because it is subjective. The means test is a mathematical computation.

Why File a Chapter 7?

Chapter 7s are chosen more often because it is fast, effective, easy to file, and doesn’t require payments over time. Typically, a case is open and closed within a span of three to four months. This depends on the client’s promptness and cooperation such as providing all required documents. The filer is debt free except for a mortgage, car payments.   Certain types of debts such as student loans, recent taxes, child support or any domestic support obligation, and civil or criminal fines are non-dischargeable. However, the general rule does allow the debtor to keep their property because they are current, don’t owe much, or the asset’ (s) equity is exempted in the petition. If you are not current, the creditor may come into the court and file a motion to lift the automatic stay in order to allow them to move forward with repossession of your vehicle or foreclosure on your mortgage.

Why File a Chapter 13?

Although a Chapter 7 is faster and effective, many people will choose a Chapter 13 if eligible. A Chapter 13 may be the better choice for you if you have a steady income to undergo the payment plan and are in a series of situations other than consumer debt. If you are:

• Are facing foreclosure
• Are facing foreclosure and have more than one mortgage
• Have a tax obligation, student loan, or other debt that cannot be discharged but can be paid off over time in a plan.

There is no such thing as a Chapter 20, only a Chapter 7 + 13. Chapter 20s are usually performed or constructed to halt an imminent foreclosure of the Debtor’s Residence. A Chapter 7 is filed before a Chapter 13 due to so much unsecured debt, the payment plan would have been too expensive. Negotiating with a mortgage company may be a possibility. If not, file a Chapter 13 and apply the mortgage into the payment plan. Why is Chapter 20 the best option for some clients? Clients who have too much credit credit card debt and are close to foreclosure, or have undischarged debt that could go into a payment plan.

Waiting periods between discharges are listed below:

• 7 years between Chapter 7s.
• 2 years between Chapter 13s.
• 4 years between Chapter 7s and 13s.
• 6 years between Chapter 13 and 7 (if under 70% in Chapter 13 plan).

Scenarios of filing a Chapter 20:

If filed a Chapter 13 and just wanted to get “caught up”, not lien-stripping on mortgage, the debtor can still file. However, the debtor will not be able to receive a discharge.

Filing a Chapter 7 and decide to file a Chapter 13 before the 4-year waiting period, debtor will not be allowed to discharge the second mortgage. The debtor will only be allowed to become current on payments.

If debtor files a Chapter 7, is dissolved from all unsecured debt, allows mortgage to pass through only to seek a negotiation with the mortgage company, and then files a Chapter 13, the debtor will receive a new automatic stay.

What does it mean to be discharged?

The primary goal for bankruptcy is to be discharged of  partial or all debts. Thereby being able to provide an alleviation from debt is an opportunity for a fresh start.  A discharge in a Chapter 7 may be approximately four months after filing. A Chapter 13 generally takes three to five years after filing. The discharge acts as an injunction which does not allow creditors to continue to either garnish, sue, or any action to collect any debt that was discharged. An injunction is a judicial order that does not allow a person from beginning or to continue to potentially violate or violate one’s legal rights.

Reaffirmation Agreements

A Reaffirmation Agreement is an agreement entered into between the Debtor and the Creditor during a Chapter 7 Bankruptcy. By signing the reaffirmation agreement, the Debtors agree to remain legally obligated to some or all debt that would otherwise be discharged. These agreements propose that the debtor is giving up the right to discharge a debt. Do not consider an agreement if:

• The debt is completely unsecured
• The debt is a high- cost loan or contains credit terms that are abusive.
  • If the creditor denies negotiating or accommodating on practical terms.
• No interest on keeping collateral that debt is secured upon.
• The debtor is behind on payments and creditor refuses to conform to a payment plan to cure the default.

Etc