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Personal Bankruptcy Options

If you are contemplating personal bankruptcy options, you typically have two choices:  Chapter 7 and Chapter 13 bankruptcy.  

Chapter 13 bankruptcy is known as a wage earner’s plan and can be likened to debt restructuring, similar to refinancing a mortgage. If you meet the requirements for Chapter 13 bankruptcy, you have a great deal of flexibility in restructuring your debt and, for some, it will provide the best opportunity to prevent your home from being sold at a foreclosure sale. This is a considerable benefit to Chapter 13 which is not available in a Chapter 7 liquidation process, as Chapter 7 is not designed to save a house from foreclosure sale. Additionally, Chapter 13 bankruptcy safeguards you from direct communication with your creditors, as they will receive payments solely through a court-appointed Chapter 13 Bankruptcy Trustee.

When referring to bankruptcy, most people think of Chapter 7 which in a few cases involves the liquidation, or sale, of your assets that are not protected from seizure. Protected assets are referred to as “exempt” assets, which often will include the equity in your home. Your home and personal property are listed on Schedules A and B to your bankruptcy petition and your bankruptcy attorney looks to federal or NY State law to determine what assets can be protected and the extent in dollars of that protection.

Equity in Your Assets

If there is equity in some of your assets that exceeds the protections (“exemptions”) asserted by your bankruptcy attorney for you, then one option is for your attorney to negotiate a payment plan for you with the Trustee (so your creditors get at least what they would have gotten from a sale by the trustee of those particular assets).  A second option is to allow the trustee to sell those assets with the unprotected equity.  With an experienced attorney on your side, this will not come as a surprise to you because the matter of protections available and ramifications would have been discussed with you before the filing of the Chapter 7 case.  The proceeds from the sale are then distributed among your creditors according to a predetermined order of priority. Once this is done, any remaining qualifying debts are typically forgiven. 

A final alternative, especially if the trustee wants more than you can pay back monthly, is to switch (“convert”) the case to Chapter 13, which gives you a longer time to pay back any equity in assets that isn’t protected.  Unlike Chapter 13 bankruptcy, Chapter 7 does not necessitate a payment plan. Therefore, individuals with limited income often choose to file for Chapter 7 bankruptcy.

Assets Typically Exempt, in Whole or in Part 

Your attorney will need to make a choice as to whether Schedule C to your petition will assert federal or state protections.   Depending on the particular assets you have, which one you choose could make a very big difference in your case.   Both state and federal exemptions may address the same assets, but provide a different dollar amount for the protection.  Under both, the following assets are protected to at least some extent:

  • Depending on the New York state county, a homestead exemption.  In Erie County the exemption is $89,000 per homeowner.
  • Clothing, appliances, wedding rings, cookware, and some personal items
  • Burial plots
  • Tools related to your profession or trade
  • Vehicles
  • Alimony and child support
  • Pensions and public benefits
  • Certain annuities

What is the income limit for Chapter 7 bankruptcy in NY? Who is eligible? 

In New York, if your income falls below the present state median of $68,814 (for a one person household), you qualify for Chapter 7 bankruptcy eligibility. However, if your income is approximately equal to this figure, the bankruptcy courts carefully examine your financial situation.

Meeting specific income levels is a prerequisite for filing for Chapter 7 bankruptcy, as it is an option primarily available to individuals with severe financial limitations. Chapter 7 allows for the potential discharge of most, if not all, debts. If you don’t meet the qualifications for Chapter 7, you have the alternative option of filing under Chapter 13, which entails repaying a portion of your debts.

Evaluating Your Income Eligibility for Bankruptcy

To evaluate your income eligibility, bankruptcy courts employ a means test, which calculates whether your income surpasses prescribed thresholds. Apart from having a low overall household income, there are other avenues to qualify for bankruptcy, which can be explored.

Fortunately, you can assess your eligibility for bankruptcy before initiating the filing process. It is advisable to consult a knowledgeable New York Chapter 7 bankruptcy attorney such as John D’Amato to discuss your financial circumstances and seek their professional opinion. Engaging in this straightforward step can assist you in avoiding unnecessary debt expenses and futile endeavors by moving forward with bankruptcy relief.

The New York Means Test

To initiate a Chapter 7 bankruptcy filing in New York, you must successfully pass the means test. This test is applicable only to individuals with higher incomes. As previously stated, if your income is below the current state median, you meet the income eligibility criteria for filing Chapter 7 bankruptcy. However, if your income is close to that amount, the bankruptcy courts will examine your financial situation more closely.

The calculation for determining eligibility begins with the state median household income. The median income serves as a reference point for the Chapter 7 income limits. If your household income is lower than the median income for a household of the same size, it means your income falls below the prescribed limit. As a result, you successfully pass the Chapter 7 means test and meet the income qualifications for filing Chapter 7 bankruptcy.

How the Means Test Works

Bankruptcy courts employ the means test to restrict Chapter 7 filings to individuals with the least financial stability. In addition to examining wages, the means test takes into account your disposable income, which refers to the funds remaining after fulfilling all necessary expenses and standard living costs.

Families with higher disposable incomes may not meet the requirements for Chapter 7 bankruptcy because available disposable income can be utilized to repay debts under Chapter 13 bankruptcy. It is important to note that the bankruptcy means test solely takes personal debt into consideration, regardless of the bankruptcy chapter being pursued.

The subsequent test evaluates your income, assets, and equity, which are the sources of cash inflow into your household. Subsequently, your debt and allowable living expenses are subtracted from your assets. Allowable living expenses encompass various items such as:

  • Food, housing, and clothing
  • Healthcare-related expenses
  • Household maintenance and supplies
  • Cell phone, internet, and utility expenses
  • Tax payments and insurance premiums
  • Court-mandated payments

After deducting these expenses from your income and assets, the resulting figure represents your disposable income. If your disposable income exceeds 25% of your total debts, it is likely that you do not meet the eligibility requirements for Chapter 7 bankruptcy.

Contact a Buffalo bankruptcy attorney 

Filing for Chapter 7 bankruptcy can be daunting. It is crucial to engage in a discussion about your bankruptcy case with an experienced lawyer prior to proceeding.

To help you assess which bankruptcy chapter is best for your situation, we recommend contacting John D’Amato at 716-706-0000 today for a consultation.

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