Top Tips in Deciding Whether to File a Chapter 7 bankruptcy
This is a guide for the undecided. Over the last 23 years thousands of clients have decided to file a chapter 7 bankruptcy in my office. There are several reasons why people file for bankruptcy. Be it too much credit card debt, overwhelming medical bills, repossessions, foreclosures, etc... .
Four Reasons to File a Chapter 7 Bankruptcy1. Too much unsecured debt. Unsecured debt are debts that, for the most part, are debts that can be discharged in bankruptcy. I am often asked how much unsecured debt is necessary to qualify to file? The answer is different for each debtor. When I evaluate the debtor's ability to catch up on back debts without filing I analyze the debtor's income and expenses. If the debtor has no disposable income after paying one's reasonable and necessary expenses the decision to file becomes easier. As a rule of thumb if a debtor has over $5,000.00 in unsecured debt and no way to pay it back, I will normally advise that a chapter 7 bankruptcy is a viable solution to the debtor's financial problems.
2. Lawsuits. When a person is sued for a debt the creditor will usually get a judgement. The judgement is followed by garnishment. A person can have his paycheck garnished at a rate of 25%. That amount can break one's budget. Meaning that the person may not be able to provide for himself or his family the basic necessities.
3. Repossessions. When a vehicle is repossessed it will be eventually sold at auction. The price it is sold at is usually far short from paying off the note. Lawsuits soon follow that culminate in a judgement then garnishment.
4. Foreclosures. In general if there is one mortgage on a home that was foreclosed upon, it is sold at a sheriff sale at the price of the underlying mortgage. If this happens then there will be no follow up lawsuit. If it is sold at well below the amount owed on the underlying mortgage, then there is remote possibility that the lender will sue for the difference. More significantly, when there is a second mortgage that mortgage is usually not covered by the amount collected at the sheriff's sale. That means that the second mortgage holder is stuck with the entire amount remaining on the second mortgage. Quite often the second mortgage holder will sue the borrower for the remainder owed on the second note.
Three Requirements for Filing a Chapter 7 Bankruptcy1. Means Test. In order to qualify for filing a chapter 7 bankruptcy one must be able to pass the means test. The means test is based on a debtor's household gross income calculated by adding up all household income over the previous six month period and dividing that amount by six. The quotient is compared to the median income of the same number of household members as the debtor. If the number is under the median income the debtor qualifies. If it is over then the debtor must go to the other parts of the means test that take into consideration other expenses.
2. Best Effort Test. The Court will analyze the debtor's net income and subtract it from the debtor's reasonable household expenses. If the expenses are about the same or over the net income, the debtor passes the best effort test.
3. The debtor has not filed a chapter 7 bankruptcy in the last eight years. If the debtor had filed we start the counting from the debtor's previous bankruptcy's filing date.