Breaking the news: Chapter 13

One of the tough parts of my job is when I need to be the one to first break the news that a fresh start isn't in the near future for a client. Chapter 7 just isn't appropriate for all cases.

The four main reasons why clients will file Chapter 13 are:

• Means Test Qualification
• Asset Protection
• Prior Chapter 7 case within 8 years.
• Foreclosure.

Foreclosure and prior case filings are usually simple if/then checkoffs that most callers will have understood well during their own research.

Asset exemptions and the Means Test are more complex topics. Plenty of times I'm the first contact with a solid understanding of these topics. That can make me the bad guy. Read on:

Means test failure.

Unexempt assets.

The Means Test

The Means Test.
For those brave souls attempting to file cases Pro Se, without an attorney, I can think of only one phrase worse than this to send you running to hire an attorney, and that's 'loose your house.'
The test is quite simple, but you need to flex those dormant High School Math Muscles and reference a half dozen government charts.

But I'll give you the easier version.
First, the median income. Most people filing bankruptcy don't even need to run the full means test. It's an Ebert style Thumbs Up/Thumbs Down test. Is your houseshold income higher than the median household income for your family size and your state?
If it's lower, you can file Chapter 7. If it's higher, well, you might still qualify for Chapter 7, you've just got more math to work through.
Link to the full official listing.

For example: Illinois.
One Person: $47,355
Two People: $60,049
Three People: $68,730
Four People: $81,184
Most people can simply look at the number, shrug, and know without a doubt they pass.
But, income is seldom even. The rules are smart enough to take that into account. It's based on the six months prior to your filing date.
Good news teachers and construction workers, pick the season you file your case and those slow months drag down your income quickly.
Bad news if you want or need to file quickly. Overtime, bonuses and part time work can flex against you.

The second half of the test is only for those whose income is higher than the median.
I won't dig into each line item, it's messy. But, just some generalities.
The question it's out to answer is simple: can you repay your debt at all?
If you can, you must, at least as much as you are able to. You don't qualify for Chapter 7.
If you have no ability to repay, you don't need to. You qualify for Chapter 7.

Where the test gets sticky to explain is what qualifies as normal expenses. I've had people shocked that they couldn't file Chapter 7. They spend everything they earn. The test is a cruel mistress, it doesn't what you do spend your money on, it holds your budget up to everyone else in your county. Lots of people are spending more than their neighbors and these numbers will prove it.