What if your income is too high, all your assets aren’t protected, you’re not current on your secured debts, and you can’t write off all your debts?
If Your Income is Higher than “Median Income”
To qualify to file a Chapter 7 “straight bankruptcy” case, you must pass the “means test.” The easiest way to pass it is if your income is no higher than the “median income” for your state and family size. “Median income” is the amount at which half of the households within an area earns more and the other half of the households earns less. (It is lower than “average income” and considered a more accurate representation because it is less skewed by the relatively few extremely high income earners.)
Here is a table of the current “median income” amounts for your state and family size.
“Income” has a specialized meaning for this purpose, much broader than normal taxable income. It generally includes all funds received from all sources, with limited exceptions. And instead of being based on what was received during a previous year, it looks only to the 6 full calendar months before the bankruptcy filing.
Although passing the “means test” is easiest if your income is less than median, often you can still pass the test and file Chapter 7 based on your expenses or under unusual circumstances. But qualifying may get more complicated.
If Not All of Your Assets Are “Exempt”
In most Chapter 7 cases, all of your assets are protected through “exemptions”—categories of assets which cannot be taken from you by the bankruptcy trustee (acting on behalf of the creditors). But sometimes you may own one or more assets that are not covered by an exemption, giving the trustee the ability to take it, sell it, and pay the proceeds to your creditors. But this can play out in a number of ways.
Your bankruptcy trustee may decide that the time and expense to collect and sell the non-exempt asset would not be worth the likely sale proceeds. Some assets are difficult to value, or to sell, or determining their value would cost a fair amount of money—for example, if a lawsuit would need to be filed to potentially turn a claim into cash. The trustee has a lot of discretion about what to do with any non-exempt assets.
If you have such a non-exempt asset that you want to keep, you can pay the trustee for the right to keep it. Your attorney can often arrange for you to keep the asset by paying what the trustee would have received from selling it. The trustee would then pay that money to your creditors.
Finally, the trustee may just go ahead and take the non-exempt assets, sell them, and use the proceeds to pay a portion of your creditors.
If Not Current on Your Secured Debts
Generally, in a Chapter 7 case if you are behind on your home mortgage or vehicle loan or other secured debt, you may be able to keep the collateral or you may decide to surrender it.
The creditor may let you catch up by paying the regular monthly payments plus an extra amount for the arrearage. Whether you will be able to do this depends on the kind of debt and the flexibility of the creditor. Vehicle loan creditors don’t tend to be flexible, usually making you to get current within a month or two after filing. Mortgage holders are usually more flexible, usually giving you about a year to get current.
The further behind you are on a debt with collateral that you want to keep, the more difficult it would be to do this in a Chapter 7 case.
However, you always have the right to surrender the collateral to the creditor, and then discharge whatever remaining debt you may owe. This generally does not complicate a bankruptcy case, even though the remaining balance after a surrender can still be huge.
If You Have Debts That Continue to Be Owed
The main purpose of a Chapter 7 case is to discharge (write off) your debts. Most if not all of your debts will usually be discharged. But some special ones may clearly not be dischargeable (certain taxes, support obligations, for example). Others may be at risk depending on the aggressiveness of the creditor. The last thing you want is to file a case only to learn that some of the debts you expected to be discharged will not be. Avoiding such bad surprises is a good reason for you to have an experienced bankruptcy attorney.