Bankruptcy: Chapters 7 and 13

First, I am not in favor of filing for bankruptcy.  Second, if you have not heeded by financial advise over the past several years about debt elimination, you may need the following information from NOLO about Bankruptcy, Chapters 7 and 13, over the next couple of years. That is, if you don't get your financial house in order!

"Under pre-2005 bankruptcy rules, most filers could choose the type of bankruptcy best for them -- and most chose Chapter 7 bankruptcy (liquidation) over Chapter 13 bankruptcy (repayment). The law passed in 2005 prohibits some filers with higher incomes from using Chapter 7 bankruptcy.  

Under the rules enacted in 2005, the first step in figuring out whether you can file for Chapter 7 bankruptcy is to measure your "current monthly income" against the median income for a household of your size in your state. If your income is less than or equal to the median, you can file for Chapter 7 bankruptcy. (For example in the state of Missouri for a family of size four, the median family income is $71,550.)  If it is more than the median, however, you must pass "the means test" -- another requirement of the new law -- in order to file for Chapter 7. [Find your state's median income here.]  

The purpose of the means test is to figure out whether you have enough disposable income to make payments on a Chapter 13 plan. To find out whether you pass the means test (Form 22A), you subtract certain allowed expenses and debt payments from your current monthly income. If the income that's left over after these calculations is below a certain amount, you can file for Chapter 7.

To get your current monthly income (CMI), add up the total income you received from all sources during the six-month look back period, and then divide by six to come up with your average monthly income.  Then, determine your eligible expenses, such as the following categories:

1. Taxes: Since you normally have to pay taxes on your income, you can deduct your tax obligations from your income on the means test as well.
2. Involuntary deductions: These include deductions required for employment such as mandatory retirement plans, union dues, or uniforms.
3.  Health, disability, or term life insurance: You are allowed to deduct the actual amounts you spend on health, disability, or term life insurance expenses.
4. Secured debt payments: These include payments on secured debts such as your mortgage or car loan. Even if your mortgage or car payment is above the national or local living standards, you can normally deduct it in full on the means test. However, the means test looks at the total amount you will have to pay in the 60 months following the bankruptcy and averages your monthly obligation based on that amount. So if your car or mortgage will be paid off in less than 60 months, you can only deduct the 60-month average and not your entire current monthly payment.
5. Court ordered payments: If you are required to pay domestic support obligations such as alimony or child support, you can deduct these expenses on the means test.
6. Child care: Expenses for child care such as babysitting, day care, or preschool may be deducted on the means test.
7. Health care: If you incur more out-of-pocket health care costs (other than insurance) for the health and welfare of you or your dependents than the allowed national standard, you may be able to deduct the actual amount you pay.
8. Education for employment or disabled child: You can deduct your education expenses if those expenses are required for your employment or for your mentally or physically disabled child.
9. Charitable contributions: If you regularly made charitable contributions prior to bankruptcy and expect to continue making those contributions, you can deduct them on the means test.
10. Care of elderly, chronically ill, or disabled: You can deduct the amount you contribute towards the care of an elderly, chronically ill, or disabled family member or person in your household.
11. Expenses for special circumstances: If you incur additional expenses for you or your family’s health and welfare because of special circumstances, you may be able to deduct them if you explain your situation to the satisfaction of the court."

Use the online Chapter 7 Means calculator here.

A question that usually comes up is how often may one declare bankruptcy once one has files for either Chapter 7 or Chapter 13?  If one received one's first discharge under a Chapter 7, one cannot receive a second discharge in any Chapter 7 case that is filed within eight years from the date that the first case was filed.  On the other hand, if one received one's first discharge under Chapter 13, one cannot receive a second discharge in any Chapter 13 case that is filed within two years from the date that the first case was filed.