Do I file For a chapter
7 bankruptcy or a chapter 13 Bankruptcy debt consolidation
plan?
The reality about personal bankruptcy and how the
bankruptcy law works is that many people do not have a
choice about which type of bankruptcy they file.
If you file Chapter 7 personal bankruptcy when you have
income that, after reasonable living expenses, is
sufficient to pay a significant portion of your unsecured
non-priority debt over 3 years, the United States
Bankruptcy Trustee will file a bad faith objection to deny
your Chapter 7 bankruptcy discharge. Section 707(b) of the
bankruptcy code holds that it is bad faith for you to file
Chapter 7 personal bankruptcy when you really don’t need
it. Bankruptcy law does not allow you to discharge your
debts simply because you want to. You have to prove that
you really need the discharge and not simply filing to
eliminate debts that you could pay a significant portion of
in a Chapter 13 debt consolidation / reorganization plan.
Chapter 7 personal bankruptcy is not a get out of debt free
card.
If you file a Chapter 13 debt consolidation /
reorganization plan (to stop foreclosure or control taxes
for example) if you do not have enough income in excess of
your reasonable living expenses to make plan payments, the
Chapter 13 Trustee will file a motion to dismiss your
Chapter 13 debt consolidation / reorganization plan because
the Chapter 13 plan is not feasible. Even if there is some
additional income above your reasonable living expenses, if
it is not enough to pay the debts that are proposed, the
Chapter 13 debt consolidation plan will not be approved by
the court. Ironically, filing a plan to pay your creditors
eveything you owe them can be determined to have been filed
in bad faith when the plan clearly was not supportable.
There are times when a Chapter 13 debt consolidation plan
can be partly supported by sale or refinancing of a home or
other property, or a legitimate plan for increased payments
later where it is clear that they will have more income to
support the raise in payments. Those situations are often
very complex and should never be attempted without the
guidance of a highly trained bankruptcy attorney
(preferably one who specializes in personal and small
business bankruptcy).
To be able to determine whether a bankruptcy court or
bankruptcy trustee is going to challenge your bankruptcy
filing will depend on the combination of 3 factors. They
are: (1) the net monthly household income; (2) the
reasonable living expenses for the household; and (3) the
amount and nature of the debts you have. Having accurate
net income information then deducting reasonable monthly
expenses will determine your net disposable income. It is
then that the trustee (or your attorney) will be able to
compare that net disposable income to your actual debts to
determine what form of bankruptcy you are legally entitled
to file.
It is extremely important that you know what your “net
disposable income” is so you can tell which type of
bankruptcy you are going to be able to file before you even
see the bankruptcy attorney.
When determining what your income is for bankruptcy
purposes to see if a filing is a “good faith” filing the
trustee will look at what voluntary deductions are being
taken out of both your paycheck and your spouse’s paycheck
if you are married and not separated. This information is
necessary even if your spouse is not going to file with
you. Examples of these “voluntary deductions” include
payments on debts that are taken out of the paycheck such
as loan payments on retirement loans, employer loans, car
payments and credit card debts. Other items considered as
voluntary deductions include voluntary retirement payments
and 401(k) deductions.