There are 4 primary areas of interest when determining whether someone “qualifies” for a Chapter 7 Bankruptcy filing that an experienced bankruptcy attorney will consider when a potential client comes in for a case analysis. The first two are income based. The third has to do with protection of assets and the fourth is in regard to what are known as “avoidable” transactions. They are as follows:
1) Means testing
A purely mechanical formula. Add the gross amount before taxes of all of your income in the past full six months. All forms of income count (including disability, pension, child support or alimony) with the exception of social security. Divide by 6 and multiply by 12. Then compare it to the median income numbers found here. LINK If you are lower than the median income for your household size then you pass the means test for filing a chapter 7 bankruptcy case.
2) Current income vs. expenses
Here is where your household budget expenses come in. Take the net income after taxes and other withholding from your wages against the reasonable and necessary living expenses you incur. Click here for a helpful form for figuring out a budget. ****link*** If you are in the negative or have very little disposable income left over after your expenses then you most likely qualify for a chapter 7 bankruptcy case.
3) Protection of assets
In most chapter 7 bankruptcy cases all assets are protected. You are required to list everything you own on your bankruptcy petition. If you can protect it all then it is known as a “no asset” case and that is most common result. Click here to see what the current exemptions are under the federal bankruptcy code and the Minnesota State Statutes. ***link*** *Note that these numbers will change from time to time as they are indexed.
Basically the way that exemptions work is that for many types of property there is a specific rule that covers that particular kind of property up to a certain amount of value. So much is allowed for equity in your homestead, so much allowed for equity in a vehicle, etc. Fortunately, under the federal bankruptcy laws there is also a “wild card” exemption that can be used to protect any interest in any property that either has no specific exemption to cover it (i.e. cash, money on deposit in bank account, tax refunds, etc.) or there is value in an asset in excess of the exemption amount allowed for that type of property. This is where the “wild card” exemption comes in. It can be used to protect those otherwise non exempt assets until the amount available is “maxed” out. Currently the wild card exemption amount is $12,725.
Here is an example of that concept: I have a late model car that is worth $10,000.00. I have a loan against it for $4,000.00. That leaves $6,000.00 in equity that comprises my ownership interest. There is a vehicle exemption of $3,675. $6,000 minus the $3,675 – $2,325.00. I can apply the wild card to that to fully exempt the car. I then have $10,400.00 of the wild card left over that I can apply to anything else it is needed for up to the point where I have exhausted it. That is usually sufficient in most cases to cover the entire amount of a person’s property and why most cases end up being termed “no asset” cases. “No asset” means that there is nothing for the trustee to take in order to sell it and pay a dividend off to your creditors.
Note that applying the exemptions correctly is a skill that is acquired over a long period of time after filing many bankruptcy cases. You should consult with an experienced attorney to determine how the exemptions would apply in your case
Two basic categories.
- Preferences: In the usual case it is a payment to a friend or family member. Paying back friends or family is not advisable before filing a bankruptcy case. The basic rule is that you should not pay any creditor more than $600 over and above the usual payment (if there was a payment agreement) within 90 days of filing a bankruptcy case on a pre-existing debt. If so, you have “preferred” this creditor and the trustee will recover those funds from that creditor so they can throw it into the “pot” and all creditors can make a claim on the funds equally. It’s never a good idea to create a situation where the trustee will end up contacting a friend or family member of yours to squeeze them for money you repaid them on a loan because you gave them a preferential payment. If this has happened don’t despair as we can discuss ways to solve this problem.
2. Fraudulent Transfers: Occasionally someone in bankruptcy will have given, sold, traded or otherwise transferred something of value to someone else (again often a friend or a family member) for less than what it was worth. That is also not a good strategy prior to a bankruptcy filing as the trustee can “reach back” six years to avoid these kinds of transfers by requiring the recipient to turn over the property or the value received that was not fairly paid for.
Download this document > 4 Areas of Interest Regarding Chapter 7 Bankruptcy Filing
This was a very basic summary of the things that we look at most intently when doing a bankruptcy analysis for a prospective client. There are a lot of other details that go into the fact gathering and case analysis but these are the primary points we go over to determine if a case is viable or advisable. If there are some issues with any of these then there are often things that can be done pre-filing in order to mitigate problems or put our clients in a better position to file regarding income, exemption planning to protect assets or strategies to negate preferential payments or other avoidable transfers for less than full value.