Filing Bankruptcy Again – Strategies to Avoid Chapter 13
The basic qualifications to file bankruptcy again remain the same. U.S. citizens, army personnel serving over seas, and any person who owns property or does business within the U.S. may file bankruptcy. Chapter 7 imposes additional restrictions based on a previous case. You cannot re-file Chapter 7 within eight years of a prior Chapter 7 discharge, or within six years of a prior Chapter 13 discharge (unless unsecured creditors received at least 70% of their total debt), or if a prior case was dismissed with prejudice within the last 180 days.
The means test poses the greatest hurdle if filing Chapter 7 again, and determines the amount of the monthly payment owed to a Chapter 13 trustee.
The means test became effective in late 2005. Since that time, all people who file bankruptcy under either Chapter 7 or Chapter 13 must take the test. In theory, the test measures monthly disposable income for each debtor. The calculation starts with total income, subtracts expenses, to find disposable income (Accountants call this discretionary income). If filing jointly with a spouse, total household income, less allowed monthly expenses, determines disposable income.
Importantly, disposable income is a far different measure under the U.S. Code than the common understanding of discretionary income. In the later case, expenses include all basic necessities based the current cost of goods. This basic concept is absent in the U.S. Code definition of disposable income.
The test imposes national standard allowances and local standard allowances for the majority of allowed expenses used in the test. Debtors may not deduct any expense unless specifically authorized. Further, as a rule for necessities, the actual cost of living, actual cost of goods, and historical expenses of each debtor are irrelevant.
In a few important expense categories however, the test does permits debtors to deduct actual expenses. Additionally, debtors may also petition the court for a 5% increase in a few standard allowances for good cause shown.
The test uses monthly disposable in a three-pronged test. First, if the debtor(s) earns more than their state median income, Chapter 7 is not available unless qualifying under two exceptions. These exceptions apply in limited circumstances when the means test measure of disposable income is less than $200.
Taking the test the first time is frustrating for most people. The mandatory allowed budget is not adequate in many situations. Yet many opportunities exist to change results and even improve results substantially over time.
The test relies on income and expenses over last full six months. Each month, test results change. The oldest month disappears and latest month becomes part the test. Over six months, the test result is entirely new.
Small changes in lifestyle may qualify a debtor to file Chapter 7. Debtors who become acquainted with the test and a few advanced bankruptcy strategies may swing the test result dramatically. To swing the test in your favor, you must know how to calculate income, the expenses used in the test, and the expenses that remain irrelevant. When taking the test, time and knowledge combine into the power to exert great influence over next five years of your life.
If you pass the test, you may discharge all debt in as little as four months and receive a final order closing the case. If you fail the test, you must repay at least a portion of all debts and live on a mandatory budget under court supervision for the next five years.
Dave Clark is a lawyer who enjoys bankruptcy strategies questions. This article is for a client who asked, “Can I file Chapter 7 second time?” & “Does bankruptcy eliminate judgements?”