Do I Qualify For Chapter 7 Bankruptcy: Part 1

Chapter 7 bankruptcy is a great option for many individuals facing large debt burdens, especially for credit cards, medical bills, and repossessed cars. Chapter 7 bankruptcy can wipe out these debts, and any related lawsuits. It helps individuals get back on their feet and on with their lives. Chapter 7 bankruptcy is a one-time filing, and unlike Chapter 13 bankruptcy, does not require any money to be repaid to unsecured creditors.

Not all debtors, however, qualify for a Chapter 7 bankruptcy. This and the next two posts will discuss the issues which determine whether an individual qualifies for a Chapter 7 bankruptcy. I go through these questions and issues any time I meet with a new client who is considering bankruptcy. Most of these issues deal with income, property, and debts, and sometimes with timing. The initial issue I always discuss first is household income. This is the most frequent determinate of whether or not an individual qualifies for Chapter 7 bankruptcy.

Bankruptcy petition filers must, in most cases, complete a financial determination called the "means test". This is a six-month look-back of all household income. It includes non-filing spouses, and it includes a very broad definition of "income", with nearly all types of income besides Social Security income counting. This includes bonuses, unemployment compensation, one-time windfalls, retirement accounts, and even child support. It includes income that is both taxable and exempt from taxation.

This broad definition often frustrates potential filers. "Why does my spouse's income count, even if they will not be filing?" "Why is a one-time bonus considered income?" I can sympathize with these questions, but the reality is they count because Congress says they do. We have to deal with the law as it is, not as we wish it would be. However, there are a few things that can help push towards Chapter 7.

First, the amount you are allowed to earn increases with household size, which includes spouses and non-earning children. A household of one can gross (earnings before taxes) about $25,500 in the six months before filing. The allowable amount increases with each household member. For instance, a household of four can earn roughly $45,000 for the same look-back period. The more members of your family, the more you can earn and still file Chapter 7 bankruptcy. The means test is described in greater detail elsewhere on this blog, but for now it suffices to say that recent income is the initial factor in determining Chapter 7 eligibility.

What if you are above this threshold? There are a couple options. First, you can wait to file. If your income will be decreasing in the next several months, or you had a large one-time windfall in the last six months, it may be worth waiting in order to fall below the allowable income limit. Planning of this type is an important part of my job. Second, it is possible to file a Chapter 13 bankruptcy if your income is too great for a Chapter 7 bankruptcy. Chapter 13 bankruptcy is discussed in detail elsewhere on this website and in this blog. While Chapter 13 does require at least some repayment to creditors, it eliminates interest, freezes the amount owed, and stops any lawsuits. So, it is often a useful tool.

So, the first thing I will need to determine if you qualify for Chapter 7 bankruptcy is six months of pay stubs (for you and your spouse) or bank statements if you do not receive pay stubs. If you are near the threshold, having this information can make the initial consultation a lot more useful.

Contact us if you are considering Chapter 7 bankruptcy, but are not sure if your income disqualifies you. I will be happy to review your earnings and advise you on the best plan going forward.

In my next post (Part 2), I will discuss the importance of your mortgage in filing Chapter 7 bankruptcy.

Employee Income Records

Every Western District of Pennsylvania bankruptcy requires the filing of "employee income records". The exact requirements, which I will discuss below, varies from trustee to trustee. But, in every case these records are intended to provide important information that is used by the trustee to verify your eligibility to file bankruptcy.

Income is important in bankruptcy. It determines how much, if anything, you are required to repay your creditors. I always tell my clients, "we don't TELL the court anything, we have to SHOW them." Employee Income Records are no different. We can't just tell the court and the trustee how much money you have earned, we need to show them with pay stubs, bank statements, and tax returns. In all cases we will need to provide the trustee with proof of income from ALL sources for the 60 days before filing bankruptcy. This will obviously include income form work, and we will need to provide pay stubs for this period. It also includes income from sources such as Social Security, unemployment, child support, alimony, pensions, or even household contributions. If you do not have tangible proof of these payments, I will draft a verified statement for you to sign which basically attests that you received the payment.

It should also be pointed out that if you are married, we must provide proof of income for your spouse as well, even if your spouse is not filing. The court looks at "household income", which will include a working spouse's pay. There is an important exception... if you and your spouse are legally separated, you are not required to provide their income. In these cases, their income is not "household income."

There are additional requirements for employee income records beyond proof of income for the last 60 days, though the exact requirements vary by trustee. All trustees will want to see your most recent tax returns and W2s. This is so they can verify your income for the last year. If it was very high, they will want an explanation (for instance, say you made $250,000 the year before filing bankruptcy) as to where the money went. Some trustees will want to see the last two years before filing. Tax returns will allow the trustee to see all sources of income for the last year or two, and compare it against the rest of your statements. If your tax return shows a disbursement from a retirement account, it better be accounted for in your petition.

Trustees sometimes also want to have proof of any retirement accounts or life insurance policies. They want to verify that no large deductions have recently been taken from these accounts. If you are self-employed, the Chapter 13 trustee will want to verify one year of business income and expense statements, and you will need to complete a business questionnaire (this is a topic for another blog post). Some trustees also wish to be provided a copy of the voluntary petition filed with the case.

I will know exactly what information is necessary to provide when your trustee is assigned. I collect all of this information before filing in anticipation of providing the employee income records. I forward all of the information from my office, so you will not need to worry about any of this, but it is good to understand why you need to provide it. When the employee income records are properly compiled, there are rarely issues with the case.

Contact us if you have any questions about bankruptcy and wish to set up a free consultation.

What Is A Bankruptcy Claim?

Bankruptcy claims are an important part of Chapter 13 bankruptcy (and to a much lesser extent in Chapter 7 bankruptcy), and worth an explanation. Chapter 13 bankruptcies involves payments being made to creditors, via the US Trustee's office. At the beginning of the case, the debtor estimates how much each creditor should be paid. The exact amount, however, is not determined until the creditor files a bankruptcy claim.

A bankruptcy claim is submitted by the creditors to the bankruptcy court using Official Form 410. Upon receiving notice of the case filing, creditors have a deadline to submit the claim (the longer deadline for government agencies is within 6 months of the filing of the case). If the creditor fails to file a claim, the creditor does not get paid. So, if an unsecured credit card does not file a claim on time, they will not receive any distributions from the bankruptcy plan. Failure to file a claim by a creditor will sometimes be a problem for the bankruptcy debtor. If the debtor wants or needs to make a payment through the bankruptcy plan (for instance, to pay arrears on a mortgage) the lack of a filed claim could be a problem. Fortunately, in these situations, the debtor's attorney can file on behalf of the creditor. This is not a frequent occurrence.

Assuming all claims are filed on time, they will determine how much money must be paid into the plan and disbursed. These claims can be reviewed by the debtor's attorney and objected to if they are inaccurate, unsubstantiated, or false. Objections to claims can be the subject of another post, but for now it is worth pointing out that filed claims are not the final say. In fact, the US Trustee can also object to a claim if they believe it will be harmful or unfair to other creditors. Therefore, it is important to review every claim filed.

The most important claims to review are typically claims for mortgages and car payments. They will normally be the largest claims, and they are both "secured" claims, which means they must be paid in full if the property is to be retained and the plan successfully completed. They should also provide interest rates, arrears owed, and total balances. These secured claims should always be reviewed extra closely. If the estimates of secured claims at the beginning of the case are inaccurate, the case will likely need to be amended. It is also important that these claims are accurately accounted for so that the case can be closed properly at the end of the payments.

Another important, and frequent, type of claim is for taxes and municipal liens. These are often not accurately known by my clients at the beginning of the case, and sometimes estimated quite loosely. I closely review these claims (usually filed by local municipalities and the IRS), discussing the amounts claimed with my clients. For one thing, I want to make sure they are accurate. Also, if they are, I need to determine how much the plan payment must be increased to account for the claim. Once again, these claims must be entirely accounted for if the case is to be discharged at the end.

A final important type of claim to discuss is the post-petition claim. These are claims filed for debts incurred after filing. These post-petition claims usually involve unpaid utilities, such as gas service. If the debtor fails to pay these post-petition utilities, the bankruptcy court will allow the lifting of the automatic stay, allowing the utility company to file a claim and be paid through the bankruptcy plan. Therefore, it is important to keep these payments current.

Bankruptcy claims are an important part of the bankruptcy process. My office closely reviews filed claims to determine how they will effect our clients cases. Contact us if you have any questions about bankruptcy claims. 

Getting Ready For The Meeting of Creditors

My clients are often anxious about their bankruptcy Meeting of Creditors. This is understandable, as the process is new and unknown to them. However, a little preparation beforehand can greatly reduce the anxiety by making it clear that the process will go smoothly. What exactly do you need to know about your Meeting of Creditors? Here are some simple tips.

First, you will need to know the location and time of the meeting. This will be mailed to you by the Court, in the form of the Meeting of Creditors Notice. If you do not receive this notice within a few weeks of filing your case, contact your bankruptcy attorney. The location will be determined by your county of residence at the time of filing, and the date is usually 4 to 6 weeks after filing. It is important to schedule appropriately once you receive this date, as you may need to miss work or school, or get a babysitter. You'll have plenty of time to do so, but if you fail to appear twice, your case may be dismissed. Once again, if you have any questions about the location, contact your bankruptcy attorney immediately.

The second thing you will need to be prepared is a government issued photo ID and your original Social Security card. These are used by the Trustee to identify you, and your Meeting of Creditors will not proceed without them. Make sure you put both pieces of information aside, as failure to do so will lead to a rescheduled meeting, which may result in additional legal fees.

You may also want to review the information sheet provided by the US Trustees office before your Meeting of Creditors. You will be asked directly if you have reviewed this sheet. Your bankruptcy attorney should review this information with you before filing, which includes filing requirements and information about the different types of bankruptcy. This information sheet should be available at the meeting location if you have not reviewed it beforehand.

If your case is a Chapter 13 bankruptcy, you should also bring proof that you have begun making payments into your plan. This may include a copy of any money order you mailed in on your own, or a recent pay stubs showing the wage attachment being deducted. This shows the Trustee that you are complying with the terms of your plan, and that granting interim confirmation is reasonable.

Finally, each trustee will ask a set of his or her own questions. You should review these questions with your attorney at least once before your meeting date, and on the day of the meeting. Knowing the questions, and how straightforward they are, should greatly reduce your anxiety over the process. The questions differ slightly from trustee to trustee, but an experienced bankruptcy attorney should know exactly what they will ask. Reviewing these questions once last time may also jog your memory of any errors or omissions, of which the trustee should be made aware. If you review the questions beforehand, nothing should take you by surprise on the day of the meeting.

In summary, preparing for your bankruptcy Meeting of Creditors is simple... know the time, date and location. Be familiar with the questions. Have your ID cards. Contact us with any questions about your bankruptcy Meeting of Creditors. It will go more smoothly than you can imagine.

Summer Is Here

Summer is all too brief in Pittsburgh, but with Memorial Day in two days, it is finally (almost) here. Summer has great associations of family, friends, fireworks, cookouts, and baseball (or, in Pittsburgh, playoff hockey and Steelers training camp). However, for families facing debt, it can cause a few issues. Here are a few tips if summer is causing more worry for your budget than you care to think about.

• Seasonal employment. It can either help or hurt your budget. If you are a teacher or work in the education field, summer can mean a major decrease in income. If you are in Chapter 13 bankruptcy, this can negatively impact your plan payment. If you are facing a summer decrease in income, or even unemployment, let your bankruptcy attorney know as soon as possible. He or she may need to alter your bankruptcy plan to account for the reduced income. On the other hand, summer may mean an increase in income if you work in construction or the service industry. Warm weather may be your best opportunity to put some money aside, or catch up on a Chapter 13 bankruptcy plan. Be sure to let your attorney know about any large increases, as well. An increase in income could prevent some people from filing Chapter 7 bankruptcy.
• Increased childcare costs. No school is great... to kids. However, parents may face daunting day care and babysitting bills while the kids are home. This is another major stress on Chapter 13 bankruptcy plans. It's best to plan ahead, but if school lets out without a plan in place, you may need to wing it, or even delay a bankruptcy filing. This is a short-term problem, but no doubt a problem for some.
• Vacation costs. Vacations are another stress on tight budgets. It's hard to say "no" to kids wanting to go to the beach, or even to deny yourself after a hard year of work. But, if you are facing financial difficulties, it may mean taking a more modest vacation. One week instead of two, and driving instead of flying (especially with kids) can make budgeting a vacation much more manageable.
• Moving. Summer is the time of year where most people will move to new apartments and rentals. If you are considering bankruptcy, moving beforehand may be a good idea. Most landlords will not care about a bankruptcy on your credit history, but for the few who do, filing after signing your lease may be prudent.

I always tell my clients that debt and finance problems are temporary and fixable. They should not ruin your summer, let alone you life. If you are considering filing bankruptcy this summer, contact us to set up a free consultation.