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BankruptcyLawyerHonolulu: Should I file a Chapter 7 or a Chapter 13? What happens when only one spouse files
The first step in the bankruptcy process is to determine if you can file a Chapter 7, or whether you must or should file a Chapter 13 instead
By Honolulu Attorney, Brian Kawamoto
To determine if you can file for a Chapter 7, all consumer debtors must first take the median income test
If substantially all of your debts are business and not "consumer debts" then you could file for Chapter 7 and you don't have to complete the median income or the means test. Most cases however deal with consumer debts, so for those people it would depend on whether or not you pass the median income test and if you fail that then you must see if you pass the means test. Basically the median income test compares your gross pay that is averaged out over the last 6 months* with that of the average family the same size as yours. Go to http://www.justice.gov/ust/eo/bapcpa/meanstesting.htm for median income test figures. If you family size makes less than the median income figure then you pass the median income test.
If you pass the median income test then you do not have to complete the means test and you "could" file for Chapter 7, however whether you "can" file a Chapter 7 now depends on whether your Schedules I and J (Income and Expense schedules) show no significant disposable or "net monthly income" (see Schedule J, paragraph 20c - it is this "net monthly income" amount that the Trustee looks to see if you have the ability to pay back your unsecured creditors), if this "net monthly income" amount is deminimus in comparison with your unsecured debts, then you can file for a Chapter 7. My unofficial take on this, for whatever that is worth, is that if your net monthly income is less than $109 then this amount would probably be considered as deminimus (this may however vary depending on the amount of the unsecured debts that are owed). To see what Schedule I looks like, click here http://www.uscourts.gov/uscourts/RulesAndPolicies/rules/BK_Forms_1207/B_006I_1207f.pdf and to see what Schedule J looks like, click here http://www.uscourts.gov/uscourts/RulesAndPolicies/rules/BK_Forms_1207/B_006J_1207f.pdf .
IN DETERMINING "NET MONTHLY INCOME", EXPENSES THAT YOU CLAIM ON SCHEDULE J , MUST BE "REASONABLE AND NECESSARY" In arriving at your "net monthly income" the Trustee's office will scrutinize all of your expenses that you list down on your Expense Schedule J. Why do they do this? Simple, if you have certain excessive or unreasonable expenses, and if these expenses are disallowed then you will have "net monthly income" to pay back something to your creditors. If it is a Chapter 7 case, any unreasonable or unnecessary expenses could be challenged by the Trustee and if successful your discharge would not be granted unless you convert your case over to a Chapter 13 case. If it is a Chapter 13 case, any unreasonable or unnecessary expenses that are disallowed would have the effect of you paying more towards your plan payments or to your unsecured creditors. There are numerous court cases that have found "unreasonable expenses" in both Chapter 7 and Chapter 13, some of them are listed as follows:
- EXPENSES THAT ARE GENERALLY CONTESTED BY THE TRUSTEE: Any "luxury" type of expense may be challenged by the trustee. For example excessive entertainment expenses, 2nd home or vacation home mortgage payments, time share payments, recreational vehicle or boat or ATV, recreational motorcycle payments if you already have car payments, two auto loan payments when there is only one driver in the household (this may become an issue if you are not paying back 100% of your creditors claims under a chapter 13 plan), excessive rent or excessive house payments, excessive car payments on luxury vehicles, private school or public university tuition for your adult children over 18 years of age (tuition for yourself is generally not allowable unless it is required for your occupation or to maintain your license), delivery bottled water service. These are not hard and fast rules as your individual situation may vary but the list goes on and on, which any experienced bankruptcy attorney or lawyer in Honolulu can tell you. Therefore just because you are paying for a living expense may does not mean it is allowable, as it will ultimately depend on whether the expense is reasonable and necessary under the facts and circumstances of your case.Once when I was at a creditors hearing, the Trustee asked the debtor, why in his budget under Schedule J, the debtor included monthly time share payments as an expense, apparently the debtor was not aware of the court cases that had previously held that these kind of expenses were not necessary expenses and could not be claimed under Schedule J as they were "luxury" expenses instead. Some expenses may be necessary for one debtor but unnecessary for another, for example say one debtor deducts $500 a month for taxi fares, simply because he rather let someone else chauffeur him around town instead of driving his own car, another debtor was convicted of DUI and cannot drive his own car, the second debtor's taxi expense under these facts would make it more "necessary" than the first debtor, especially if there is no bus service where he lives or works and catching the taxi is the only way that he can get to and from work. Now lets look an an obvious case, say a single parent debtor files for a Chapter 7, and on his Schedule J, he claims the following expenses: rent at $5,000 a month to live in Portlock by the beach, car loan of $1,200 a month for a luxury Maserati, $200 a month for a time share interest, $300 a month for ski boat payments, $250 for dog grooming, $200 for pool cleaning, $300 for landscaping and $1,000 a month for his son's private school tuition. It would not surprise me if the Trustee files a Motion to Dismiss on the grounds that the filing is "abusive" or under totality of circumstance (707b3). Not paying your creditors because you choose to live luxuriously may be challenged by the trustee, however in a surprising case In re Jensen, 2009 WL 1708229 (Bk. CD Cal April 28, 2009) the court allowed the debtor deductions for mortgage payments of $4,446 a month on an $800,000 home, a motor home with a monthly payment of $396, and a boat with a monthly payment of $760, which enabled the couple to file a Chapter 7, instead of filing a Chapter 13. Quite naturally and as totally expected the trustee moved to dismiss the case and objected to the granting of a discharge on the grounds of abuse, stating that these debts were unnecessary and by disallowing them the debtors would have disposable income to pay back their creditors by filing under a Chapter 13 instead. The court overruled the Trustee's objection, stating that since the means test allowed deductions for secured debts for any amounts, to follow the trustee's argument would be inconsistent with this provision. In arriving at its decision the court noted that the debtors incurred these debts more than two years before filing bankruptcy, that their incomes had suddenly dropped and that there was no fraudulent conduct on the part of the debtors. As this case contradicts a majority of the case law decisions (essentially many courts have previously held that debtors should do some belt tightening if they seek bankruptcy relief and that luxury expenses were not acceptable as necessary expenses), I would not be surprised if in the future, other courts decide not to follow this decision, or distinguish it. It can be said that this decision at the very least does affect the trustee's right to object to the granting of a discharge based upon abuse or totality of circumstance test, however, as Congress did not take away this right from the trustee, and as it is still a part of the Bankruptcy Code, one cannot simply ignore the fact that this power by the trustee to object still exists.
IF YOU DON'T PASS THE MEDIAN INCOME TEST THEN YOU TAKE THE MEANS TEST: If you fail the median income test (you earn more than the average family unit same as yours) then you must complete and see if you pass the much more complicated means test. On the expense side for means testing, the Bankruptcy code and case law determines what expenses are allowable. It can become confusing because certain expenses allowed for means testing under a Chapter 13 are not allowed if you are filing a Chapter 7. For example if you file for a Chapter 7 in Hawaii, contributions or loan payments towards your 401k, TSP or other profit sharing plan, is not considered a reasonable expense, but in a twist, such an expense is allowable in your Chapter 13 means test, see http://www.socaladvocates.com/blog/tag/chapter-7-401k/ for more on this issue. No one said the new bankruptcy laws make any sense. The other problem with TSP expenses if you want to file a Chapter 7 is that most employers (usually government entities) will not allow you to stop your payroll deduction, thus you will in essence you may have no choice but to file a Chapter 13 instead. Under both Chapter 7 and Chapter 13, the means test allows you to deduct payroll taxes, medical insurance, term life insurance if you have dependents, court ordered child support, home security, charitable contributions, reasonable housing, utilities, reasonable transportation, food, clothing and various other living expenses as provided for under the new law. After these calculations if you end up with a positive number it depends what that number is. Basically, if you have less than $109.58* of "disposable monthly income" or if you cannot pay more than $6575 under a 60 month plan, then you pass the means test and can file a Chapter 7, provided of course that there is no significant disposable income under your Schedules I and J. If you have $182.50* of "disposable monthly income" or if you can pay $10,950 under a 60 month plan, then you fail the means test and you must file a 5 year Chapter 13 plan. If you have between $109.58 and $182.50 of "disposable monthly income" then you have two options: If you can pay off more than 25% of your total unsecured debt over 5 years then you fail the means test and you must file a 5 year Chapter 13 plan. If you cannot pay off more than 25% of your total unsecured debt over 5 years then you pass the means test and you can file a Chapter 7, once again provided of course that there is no significant disposable income under your Schedules I and J. . *these amounts may change from time to time so please refer to most current version of 11 USC Section 707b2Ai. Arriving at the final number under the means test does get strange at times, for example under the means test, social security is not considered income, however in Schedule I you must list it down as income. Theoretically, you could pass the means test but if Schedule J shows disposable net monthly income because of your social security income, the Trustee's office if it decides to follow a recent Missouri bankruptcy case "could" move to challenge your request for a Chapter 7 discharge, forcing you to convert to a Chapter 13 repayment plan instead see in re Booker (which was a Missouri case). No one said bankruptcy under the new law was easy, I consider it to be one of the more difficult and challenging areas of the law due to the dynamics involved and the constantly changing and sometimes contradicting court decisions, depending which circuit or state you live in, thus I think you are taking a big risk if you file for bankruptcy without an attorney today. To view a copy of the form for the means test, click here http://www.justice.gov/ust/eo/bapcpa/defs/docs/samples/BK_Form_B22A_V1.pdf
NOTE: If you fail the means test but you have a "special circumstance" , then you could still try to fle a Chapter 7, provided that you can successfully rebut the presumption of abuse.
MEANS TESTING WHEN ONLY ONE SPOUSE FILES: Believe it or not, this can get quite complicated. Basically, a married person must take into account his or her spouse’s income when he or she is the only spouse filing for bankruptcy. The law states that the debtor’s non-filing spouse’s income is included to the extent to which it is contributed “on a regular basis for the household expenses of the debtor or the debtor’s dependents.” 11 USC 101(10A)(B). Thus you start first by providing your non-spouses financial information (i.e wages), then after that your spouse is allowed deductions for his/her own separate expenses as a marital adjustment, anything left over after that would be considered as disposable income and therefor available, at least in theory, to pay the filing spouse’s debts. Where there is controversy is what is considered as separate expenses of the non filing spouse? Some of the allowable type of expenses for the non filing spouse are federal and state income tax withholding, union dues, social security and medicare deductions, health insurance, separate car loan payments, if the filing spouse doesn't drive that car, separate student loan payments incurred by the non filing spouse, separate pension contributions of the non filing spouse, child support obligations of the non filing spouse and separate credit card debts of the non filing spouse and the cards were not used for the benefit of the debtor or his/her dependents. After these separate expenses of the non-filing spouse is accounted for (and these amounts should not contribute to the family's support or maintenance), whatever is left basically is becomes household income available to the filing spouse. What if the non filing spouse has substantial income and chooses to spend that income on an expensive luxury or on a vacation home, would these expenses be deductible as marital adjustments? Probably not, there are many court cases where the non filing spouse's income has generally been considered in conjunction with a Section 707 substantial abuse motion filed by the Trustee's office (the Trustee's office will basically scrutinize luxury or unreasonable type of marital adjustments claimed by the non-filing spouse) so if the non filing spouse has substantial income and chooses to claim expenses for a expensive luxury or vacation home (which benefits the debtor) as marital adjustments, the Trustee's office could file an abuse motion against you, thereby seeking to have your case dismissed. In re Travis B.R.520 (Bankr.E.D.Mich.2006), the court noted that if the non-filing spouse chooses to spend his/her income on a luxury home in which the debtor resides, some portion of that expense could be imputed to the debtor as an amount contributed for the household expenses of the debtor.The court said "“the non-filing spouse’s income should be considered if his/her income is substantial enough to significantly raise the debtor’s standard of living and generate total household income in excess of the reasonable costs of food, clothing, shelter and other necessities.” The debtor cannot “assume” responsibility for all of the household expenses leaving all of the nonfiling spouse’s income available for frivolousness. See, Louviere, infra, and In re Bush, 120 B.R. 403 (Bankr.E.D.Tex.1990). (A pre-BAPCPA case, but lack of good faith is still lack of good faith.) In re Adams, 2007 WL 3091583 (Bkrtcy.D.Md. October 18, 2007)(Schneider, J.) the court dismissed the debtor's chapter 7 case as an "abuse" under section 707(b)(1) based on the "totality of the circumstances" test of section 707(b)(3) the bankruptcy court said that if the debtor herself has no income, the court must take into account the income of the debtor's nonfiling spouse when the spouse receives significant income.
*[In a recent U.S. Supreme Court case, Hamilton v. Lanning decided in the year 2010, the court refused to be bound by the mechanical and rigid past 6 month average wage test in determining the debtor's income for means test purposes, rather the court adopted a "forward looking approach" and essentially looked at the debtor's present income in determining her ability to fund a Chapter 13 plan. In that case the debtor loss her previous job and had collected a one time payout from her employer, which inflated her past 6 month wage average. She later found and took a lower paying job so in her Chapter 13 plan she offered to pay $144 a month for 60 months, the trustee objected on the grounds that she should pay over $1,000 a month for 60 months, this based upon her previous 6 month wage average test (and as required under the Bankruptcy Code). The court found that there was no way she could fund a plan at over $1,000 a month and thus they did not agree with the trustee, instead they ruled that debtor's plan to pay $144 a month and which was based on her present income, was acceptable. Although this ruling does not nullify the 6 month wage test, it does give certain debtor's a way to realistically fund their plan. This was not an invalidation of the means test but should be used in appropriate cases]. If you have passed these tests and can file a Chapter 7, there may be other factors where you may be better off filing a chapter 13 instead, some examples are: you want to protect a co signer, you are facing foreclosure and want to save your home, you have priority tax debts and want to pay it off based on your terms per your plan, you have a second mortgage that you want to strip off. You are paying back your 401k or TSP loan, or contributing to your retirement and want to continue doing so. There may be other reasons to file a Chapter 13 instead of a Chapter 7 and you need to discuss that with your attorney.
IF YOU ARE INTERESTED IN HOW FILING BANKRUPTCY AFFECTS YOUR CREDIT SCORE, see http://hubpages.com/hub/The-Effect-of-Bankruptcy-on-Your-Credit-Report
HOW TO STOP DEBT COLLECTORS FROM CALLING YOU, BEFORE YOU FILE FOR BANKRUPTCY. A HELPFUL ARTICLE FROM THE BANKRUPTY LAW NETWORK:
About the Author
Attorney Brian Kawamoto is an experienced bankruptcy and tax attorney in Honolulu, Hawaii. His practice includes filing consumer bankruptcy cases. As a former IRS Tax Attorney, his practice also includes discharging taxes in bankruptcy*, as well as reducing or eliminating certain taxes thru non-bankruptcy alternatives, such as by negotiating with the IRS for Offers in Compromise.
*For more information if you are interested in tax matters, see http://www.irstaxbuster.com
Date of this Article: March 2011
If your home is in foreclosure and you want to keep your home, see
If there is a judgment against you and you own a home please read the following article
For a summary of bankruptcy in Hawaii see
For a discussion about the benefits and negatives of filing Bankruptcy, as well as "do's and dont's", see
Disclaimer - Statements made here reflects the author's viewpoint for general reading purposes only and therefore should not be relied upon or considered as a legal opinion or legal advice for your own particular factual situation. As the new Bankruptcy laws are very complex and changes from time to time, it is advised that you find an attorney or lawyer in your state to represent you in your bankruptcy matters. Also each state has different laws, rulings and court decisions. Each situation is fact specific, and it is impossible to evaluate a legal problem without a comprehensive consultation and review of all the facts and documents at issue. Any forms or tables that you clicked on in this article may not be the most current data as the law, tables, or guidelines change from time to time and thus are time sensitive, please verify that you are looking at the most obtain current information.