Do I qualify for a Chapter 7 or Chapter 13?

      The Indiana Bankruptcy Blog would not be complete without a posting on this "ultimate question."  After consumer debt clients understand the difference between Chapter 7 and Chapter 13 (which is generally no payments vs. payments) the next question is typically "Do I qualify for a Chapter 7?"

      The answer to that question is often depends on whether you can pass two tests.  First, the Bankruptcy Court will ask you to list all of your current monthly income.  This includes social security, unemployment, child support, and any other income you have coming into your household (your spouse's income is included even if he or she is not filing....which is a great subject for a future blog.)  Then, the Court will deduct your current "reasonable" living expenses.  For a discussion on what the Court would consider reasonable see the previous Indiana Bankruptcy Blog entry.  If you are left with more than $100.00 left per month after paying your living expenses you will not qualify for a Chapter 7 and will need to pay at least whatever you have left over at the end of the month into a Chapter 13 repayment plan.  This is the first test.

     The second test came to be in 2005 in an attempt to objectify the definition of a reasonable living expense.  This test is called the Means Test.  For this test your last 6 months of household income is added up and divided by 6 to come to your current monthly income.  Social security is not included in this calculation.  Once you have calculated your current monthly income that number is multiplied by 12 to get to an average annual income.  Your household annual income is compared to the average income of your same family size.  For example, if you are married with 2 children you will be compared to the average household of 4 in Indiana.  The averages are according to the IRS and can be found on the United State's Trustee's website.  If your average is less than the average for your family size and state, there is no presumption you have abused the bankruptcy code by filing a Chapter 7 bankruptcy.  On the other hand, if your income is higher than the average for your family size and state then there is a presumption of abuse.  In short, this means that there is a presumption that you should have enough money at the end of the month to pay into a Chapter 13 repayment plan and should not qualify for a Chapter 7.  However, all hope is not lost if your income is higher than the average for your family size.  The means test will take deductions from your current monthly income for living expenses based on averages instead of what your family may actually spend.  Therefore, the average for housing may be more or less than the rent or mortgage payment that you are paying.  Average expenses for vehicle operation, vehicle payments, non-mortgage utility expenses, and several other deductions are taken into account.  Some of the averages are national, some are for our state of Indiana and some are for the county.  (In Indiana, Hamilton County tends to have some of the higher averages for living expenses.)  Once you complete the test if the means test shows that you objectively should have less than $167.00 at the end of the month you have rebutted the presumption of abuse an may still file a Chapter 7 bankruptcy.

       One important note is that if you fail either of these tests you will not be successful in receiving a Chapter 7 discharge in most circumstances.  For example, if you have $400.00 left over each month after paying your living expenses, but the means test shows you have nothing left over, you will not qualify for a Chapter 7 Bankruptcy.  On the same note, if your current monthly income less expenses leaves you with nothing, but the means test says you should have $400.00 left over at the end of the month you will likely not qualify for a Chapter 7.  This is a flag to the Court that you are spending too much on living expenses.

       This is a general overview of how the Chapter 7 vs. Chapter 13 bankruptcy determination is made.  There may be other factors such as the amount of assets that you have, whether you are current on your house payment, etc., which also factor into whether a Chapter 7 bankruptcy would benefit you.  It is certainly necessary to meet with a qualified bankruptcy attorney to determine whether you will qualify for a Chapter 7 bankruptcy.  If you are in Hamilton County, Tipton County, Marion County or Madison County Indiana and are considering bankruptcy I would be happy to meet with you for a free consultation to discuss your options and whether or not bankruptcy might be helpful for you and your family.  Just contact Halcomb Singler, LLP, at 317-575-8222.  Please feel free to leave a comment if you have questions about this blog and I will do my best to answer them.

Halcomb Singler, LLP, is a debt relief agency.  It helps people file for bankruptcy under the bankruptcy code.  No attorney-client relationship with the firm of Halcomb Singler, LLP, is created through this blog. Also, please note that Erika Singler is an attorney licensed in Indiana and does not seek to practice law in any jurisdiction in which they are not properly authorized to do so.  The information contained in this blog is general in nature and should not be relied upon for the circumstances of any individual(s) or businesses.

What is a REASONABLE living expense?

One thing that bankruptcy debtors can count on is an objection from the trustee if he or she believes that a monthly living expense is unreasonable. Which leads me to the title of this blog. WHAT IS REASONABLE? This is certainly a relative term. What is reasonable to me may be outlandish to you or vice versa. And, more importantly, what is reasonable to you may not be reasonable to your bankruptcy trustee.

I often find myself discussing what I believe will be deemed reasonable with clients at Halcomb Singler, LLP. For example, many clients wonder if cable television is a "reasonable" living expense. The short answer, in my experience in the Southern District of Indiana Bankruptcy Court, is yes. I wish all of my reasonable living expense inquiries were this simple.

Believe it or not, bankruptcy debtors can also easily budget $100.00 per month for entertainment and $50.00 to $100.00 on haircuts (depending on family size). I have also filed bankruptcy petitions with expenses for pet food/vet care which have not been met with any objection.

Your medical expenses are reasonable. If your doctor prescribes it, it's reasonable. Save your receipts from the pharmacy showing your copay. Save receipts from when you visit your doctor. If you are in need of a medical or dental procedure, consider asking your doctor for an estimate of the upcoming cost so that it may be reflected in your budget.

One of the most subjective living expenses is food. A client with a family of 4 is often shocked to hear that I do not believe a trustee would find $1,000.00 per month reasonable for food. This is normally because that family is spending a few hundred dollars eating out each month. In my opinion eating out is better suited for the entertainment category....not food. This includes eating out at lunch during work hours. Take a brown bag lunch and just watch the savings pile up. In my experience, a more reasonable amount for groceries is about $600.00 to $700.00 for a family of four. However, if you or a family member has specific nutritional restrictions due to a disease or other reason talk to your attorney about it. Not every debtor is the same and your circumstances may make a higher living experience in one category or another reasonable while for another family the same amount would be unreasonable.

So, how are debtors to prove that their living expenses are reasonable? I often tell my clients to begin saving their receipts once they have made the decision to file bankruptcy. Chances are that they will not need the receipts. However, in the event that a trustee objects to an expense it can be very helpful to have them on hand. Telling the trustee that you spend $900.00 on groceries each month for your family of 4 is less effective than showing the trustee 3 months of receipts for groceries averaging $900.00 per month. The receipts will allow the trustee to see exactly what you are buying (food, as opposed to alcohol, dvds, or other non-food items often found at grocery stores) and help the trustee come to the conclusion that your particular expense is reasonable.

Getting your budget in order prior to the filing of your bankruptcy petition is not only helpful for your bankruptcy, but can be a great way for you and your family to move forward after bankruptcy. If you come up with a reasonable budget for your bankruptcy you can use that budget to make sure that you stay on track financially post-bankruptcy.

If you live in Noblesville, Carmel, Fishers, Kokomo, Anderson, Indianapolis or Tipton and want to know if bankruptcy might be right for you contact my office for a free consultation at 317-575-8222 or contact me for a free initial consultation.

Halcomb Singler, LLP, is a debt relief agency.  It helps people file for bankruptcy under the bankruptcy code.  No attorney-client relationship with the firm of Halcomb Singler, LLP, is created through this blog. Also, please note that Erika Singler is an attorney licensed in Indiana and does not seek to practice law in any jurisdiction in which they are not properly authorized to do so.  The information contained in this blog is general in nature and should not be relied upon for the circumstances of any individual(s) or businesses.