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Filing a Bankruptcy is not simply a matter of filling out forms and filing them with the Court. Each case requires careful pre-filing analysis and case planning. Prior to filing any case, we analyze all of the following.
(1) Analysis of Your Monthly Income
Regardless of whether you file Chapter 7 or Chapter 13 it is necessary to determine your current monthly income. In order to calculate your current monthly income, you will need to account for all income in the six months preceding the month in which you file for bankruptcy. For instance, if you file a bankruptcy in July, you must look back on your income during the months of January through June. Income from all sources is included, including wages, unemployment, independent contractor income, income from operating a business, dividend income from investments, capital gains, and even gifts. Social Security income is excluded. You then prorate your prior six month income to a yearly figure.
If your income is below the median income for your household size, you do not need to complete the means test. The current median income figures are available here. You then have the choice of filing either a Chapter 7 or Chapter 13. If you are under the median and file Chapter 13, you are allowed to propose a 36 month plan of reorganization.
(2) The Means Test
If your current income is over the median income you will have to complete the means test. This is complicated and we suggest that you have an attorney perform the bulk of the means test for you because various expense tables are required and change frequently. It is very difficult to properly complete the means test without an attorney due to the complicate nature of the allowable expenses and ever-changing case law.
The Means Test Explained
- Take Your Current Monthly Income From All Sources (As Already Calculated)
- Subtract Your Allowable Monthly Expenses Using IRS Tables
- This Yields Your Disposable Monthly Income
- Multiply Disposable Monthly Income times 60
If Disposable Monthly Income X 60 is $11,725 or more you must do a Chapter 13 60-month plan. Chapter 7 is not an option.
If Disposable Monthly Income X 60 is more than 25% of your unsecured debt you must do a Chapter 13 60-month plan. Chapter 7 is not an option.
If Disposable Monthly Income X 60 is 25% or less of your unsecured debt you may choose either Chapter 7 or Chapter 13 and may do a 36-60 month plan if you choose Chapter 13.
If Disposable Monthly Income X 60 is $7,025 or less, you may choose either Chapter 7 or Chapter 13 and may do a 36-60 month plan if you choose Chapter 13.[/box]
(3) Debt Analysis
In addition to qualifying based on income, Chapter 13 has strict debt limits that must be analyzed. In order to file Chapter 13, you may not have more than $1,081,400 in secured debt and/or $360,475 in unsecured debt. Only liquidated claims count towards these limits.
Further, some debts that are dischargeable in Chapter 13 are not dischargeable under Chapter 7. For instance, if you have a debt that you incurred due to intentional damage to property–often called “conversion”–such debts can be discharged in Chapter 13 but not under Chapter 7. Similarly, debts incurred during a divorce that are non-maintenance payments may sometimes be discharged in Chapter 13 even if these debts are not dischargeable under Chapter 7.
If you own real estate or have other secured debts like car loans, Chapter 13 offers the ability to adjust many of these debts. Chapter 13 can also be used to strip secondary liens on a primary residence. Chapter 7 does not adjust any secured debts or offer the ability to lien strip.
(4) Asset Analysis
Whether or not you choose to file Chapter 7 or Chapter 13 (or not file at all) can be greatly impacted by the property you stand to lose. Arizona has a complicated exemption scheme, which we have summarized here. If the property you own is not exempt and you want to keep it, you must plan accordingly. There are ways to keep non-exempt property in both Chapter 7 and Chapter 13, but you should know well-before you file the consequences and benefits of each and how much it may cost you.
(5) Advice Regarding Options
After you have determined what chapters of bankruptcy you may file, assessed whether your particular debts are dischargeable or adjustable, and assessed what assets you may stand to lose, you can then decide how to proceed. In order to make an informed decision, you should try, if possible, to have all of the above aspects of your case analyzed by an experienced attorney.