Monday, July 21, 2008

Most People Can Still File Chapter 7 bankruptcies

I often get asked "I hear that you can't discharge credit cards anymore?" or "that it's harder to file bankruptcy?"

The answer to the first question is, that it is not true, you can indeed discharge credit cards still. What the new law did was make it slightly harder to discharge recent charges that aren't for household expenses. In other words, if you charge over $500 in the 90 days preceding your filing bankruptcy, the credit card company can object to discharge and would most likely succeed. Otherwise, you are able to get a discharge from your credit cards with no major issues coming up in the bankruptcy.

Now the second question CAN be true depending on one's circumstances. One thing that is harder for debtors under the new law is that they MUST provide the trustee with the past 60 days of paystubs (or other proof of income) from all sources of income. Additionally they must provide tax returns (tax return transcripts are acceptable, and serve as better proof that the taxes were actually filed). Additionally, in the Eastern District of Michigan, you have to provide documentation of all your monthly expenses, and copies of loan agreements for all your secured loans pursuant to local rules. Also, your attorney will need to see the past 6 months of your income from all sources in order to determine whether you qualify for a Chapter 7 without a presumption of abuse pursuant to the means test.

Now the means test is the most difficult part about filing bankruptcy under the new law. But in reality, I find most people that want to file a chapter 7, still can. I find that most of my chapter 13 clients at this time are filing chapter 13, not because of their income, but because they risk losing their house, or because they don't qualify for a chapter 7 for other reasons (for example, filing bankruptcy in the last 8 years, or having too much equity to file a chapter 7 and still keep the property they own). If you make below the median income for your state and household size, you will qualify for a chapter 7. If you make above the median for your household size in your state, then your attorney must look at other factors in order to determine whether there would be a presumption of abuse if you were to file a chapter 7. These factors include, mandatory payroll deductions, secured debt payments (like mortgage and car), and other relevant expenses. Unfortunately, the means test is based on a mythical budget deemed reasonable based on IRS allowances. Your real budget could be in the red, but the Means test might still think you should be able to afford a chapter 13 plan. It can also be the other way around. The Means test might say that you should be in the red, but your real budget is so frugal that that isn't the case for you (you would still qualify for a chapter 7 in that situation though).

Provided that after going through this analysis, you qualify to file a chapter 7 with no presumption of abuse, you will find that it really isn't much harder to file a bankrupty. The only other thing that would require more effort from a debtor would be the fact the debtor needs to complete credit counseling prior to filing and a debtor education class after filing but before discharge in order to obtain a discharge. If those requirements are not met, you cannot get a bankruptcy discharge. For a list of providers for said classes in your state and district, go to the US Trustee's website at There will be links to their approved lists from that site.

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