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Bankruptcy Law/Filing for Chapter 7


California to both-Due to a change in employment status, I got my pay decreased and as a result could not pay my credit cards. I am in the process of filing bankruptcy and because me and my wife make a combined income in the neighborhood of 90,000 we cannot file chapter 7-I believe we can only do chapter 13.  Why do the bankruptcy rules only allow people making under a certain amount file for chapter 7?  Please clarify?  I think anyone filing would want a fresh start free of debt but with chapter 13 as you know you have to pay the creditors back some.

You can thank the credit card companies for this -- they repeatedly tried to get the bankruptcy code changed and finally "made friends" with enough congressmen that in 2005 they did so -- see the theory is that we bankruptcy attorneys are the cause of all these bankruptcy filing, because of that the system is "abused" so they invented a complicated means test to see if there was/is a presumption of abuse.  This is driven by your gross income from all sources except social security; the number in your family, and the median income for a family of that size in California (which just changed).

You should be able to do your own means test on line and see if the presumption arises;  with that amount of money you'll have to fill out the whole form to see.

Let's say you file a 13, but your surplus disposable income is 400 per month;  you could file a 13 "comp" plan whereby the unsecured creditors only get a % of what's left after secured, priority(tax) debts are paid and of course whatever remains unpaid of the atty fee;  the trustee will also take a "rake" of 10% max of whatever you pay in.

So if you had $400 disposable, x 36 = 14,400;  now from that deduct what I would estimate to be $3,000 in unpaid attorneys fees and not counting any secured debt being paid, the unsecureds would get 14,400 less 3000 less the rake of 1440 or about 9960.  Long term debt is not paid thru the plan (that which has a maturity date longer than the plan term).  So with this bare bones analysis the unsecureds would get about 11% on the dollar.

There is something else to consider and that's cram down and strip off.

If you have a second mortgage on your house and there is no equity when the value today less the first mortgage is considered, you can ask the court (via motion) to strip off the second mortgage and have it treated as an unsecured claim.

If you have a car loan and the interest rate is higher than about 4% you can "cram down" the interest rate to the "Till" rate which is about 4%, if the car is paid through the plan.

So there may be some upside for you to do a 13 here.  I strongly recommend you get legal advice and hire an attorney to give you the straight scoop.  I'm just proposing that there's more to the story than being forced to pay.  

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Consumer bankruptcy questions invited. I've been filing Chapter 7, 11 and 13 cases since 1985 in Calif and Arizona. I do NOT do homework questions. Let me know what state you're located in when you write. My bankruptcy practice is limited to California and Arizona but inquiries from other states are welcome. Your local jurisdiction determines exemptions. Find more background information at our website, Individual Chapter 11 and small business chapter 11 questions invited. We can also advise on the creditor's side if for example you have a fraud case, money judgment etc against someone who has filed (or is threatening) bankruptcy. We have filed and defended numerous adversary complaints in bankruptcy court and opposed trustees' demands for turnover of assets from time to time.


My partners and I have filed over 5000 consumer and small business cases to date in California and Arizona.

I've been a member of the California bar since 1984 and Arizona since 2004; also a member of the National Association of Consumer Bankruptcy Attorneys, Bankruptcy section of the Arizona State Bar, Tucson Association of Consumer Bankruptcy Attorneys, Arizona Consumer Bankruptcy Counsel and American Hellenic Educational and Progressive Association (AHEPA).

I've written a booklet on land trusts for real estate owners, players and dealers, and co-authored a special edition of "Stop Sitting on Your Assets". I was a writer of a monthly law review article relating to California real estate issues and pending and recently enacted legislation.

Attorney at law, experienced in trial procedures, adversary complaints filed and defended and numerous claims objection proceedings as well as filing cases for consumer and small business debtors.

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