Complications to a Chapter 7 Case
Most Chapter 7 “straight bankruptcy” cases are in fact straightforward. Here are two of the main circumstances that create complications.
Your Income is Higher than “Median”
To qualify to file for a Chapter 7 “straight bankruptcy” case, you have to pass the “means test.” It’s easiest to pass if your income is no greater than the “median income” for your state and family size. If your income is higher, it can get complicated.
“Median income” is the amount at which half of the households in an area earn more and the other half of the households earn less than that amount. Median income is usually lower than “average income,” which is simply a population’s total income divided by the number of people in the population. Median income is a better indicator because it’s less skewed by the relatively few very high income earners.
Here is a table of the current “median income” amounts (for the several months starting November 1, 2016) for your state and family size. (Check here for an update to this information if you are reading this past the time it was written in mid-March, 2017.)
Be careful because “income” has a specialized meaning for the means test. It includes much more than normal taxable income. It generally includes all funds received from all sources, with limited exceptions. And it’s not based on what was received during the prior full year. Instead look only to the 6 full calendar months before the bankruptcy filing, and then double that for the annual amount.
Even if your income is more than the median you may well still be able to pass the “means test.” It depends on your expenses or whether certain unusual circumstances apply. It can get complicated, although not necessarily.
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. If so, the bankruptcy trustee may have the right to take and sell it, and pay its proceeds to your creditors. This can play out in a number of ways.
Your bankruptcy trustee may decide not to take the asset. The time and expense to collect and sell the non-exempt asset may not be worth the likely sale proceeds. Some assets are difficult to value, or to sell or turn into cash. It may be too expensive or risky to liquidate an asset. For example, if you are owed a debt that is an asset a bankruptcy trustee may be able to turn into cash. But if the person who owes the debt has disappeared, or has no collectable assets, the trustee may decide not to spend the time and money to pursue that debt, that asset. The trustee has a lot of discretion about whether or not to go after any unprotected assets.
You may have a non-exempt (unprotected) asset that the trustee decides is worth liquidating, but you’d rather keep it. Then you can often pay the trustee for the right to do so. Your bankruptcy lawyer negotiates for you to keep the asset, often through monthly payments. The amount you pay is based on the net amount the trustee would have received from selling it. “Net amount” means the amount is reduced by any costs the trustee would have paid in liquidating the asset. These can include advertising and storage costs, a commission to the selling agent, and such. After you pay the agreed amount to the trustee, it’s paid to your creditors in a legally determined order of priorities.
The trustee may decide that a non-exempt asset is worth liquidating and you may not want to pay to avoid that. Then the trustee gets that asset, sells it, gets a commission, and pays the remaining proceeds to your creditors.
In a large majority of Chapter 7 cases, all of your assets are exempt, avoiding all of this.