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.