Choosing to file for bankruptcy is never an easy decision, but once you’ve made that decision, it’s important to be certain you don’t do anything that could hurt your bankruptcy case. The laws on Chapters 7 and 13 bankruptcy are complex, the best approach is to consult with a bankruptcy lawyer before filing.
It’s also important to start thinking about how you’re going to conduct your regular finances before and after filing. In 2006, Congress passed reforms called a means test, in part to encourage people to file for Chapter 13 — which requires them to repay at least some of their debt — rather than Chapter 7, which obliterates the debt altogether. The means test calculates whether you’ll have enough money left over each month after paying your necessary expenses to make payments toward reducing your debt.
So it helps to understand in advance what living expenses are allowed in bankruptcy.
How Do Daily Living Expenses Factor into a Bankruptcy Filing?
Many people consider Chapter 7 because it’s considered the simplest and quickest form of bankruptcy. With the help of an experienced bankruptcy lawyer, most people who file for Chapter 7 are able to do so successfully, although some high earners might not qualify. Filing for debt relief under Chapter 7 allows you to get a total discharge of your outstanding debt; but there are exceptions to consider, including:
- Student loans
- Child support payment
- Recent taxes
- Credit charges for nonessential items within 90 days of filing
Under Chapter 7, your possessions will be sold to pay creditors, although some assets are exempt from liquidation. That includes:
- Retirement funds
- Veteran benefits
- Life insurance
- Personal property up to a specified value
Not everyone qualifies for a complete discharge of their debt under Chapter 7, and if your monthly income is too high you’ll need to file instead under Chapter 13, which requires you to make payments for several years. If your income is sufficient to repay at least 25 percent of your outstanding consumer debt over five years or exceeds the annual median family income in your state, you need to file Chapter 13 and follow a payment plan for up to five years.
What is the Bankruptcy Means Test?
Low-income filers should qualify for Chapter 7 bankruptcy based on gross income alone. Those who file for consumer bankruptcy are required to take a two-part means test, which allows you to deduct certain expenses in full to reduce your disposable income.
The means test will compare your average gross monthly income over the six months prior to your filing to the median income of similar households. You should pass automatically pass if your income is below the state median since the means test takes the view that low-income debtors can’t pay back creditors.
Those with incomes above the median don’t automatically fail, but will likely have to subtract allowed expenses from their gross income. Yet, an individual who doesn’t own a business or is a sole proprietor could qualify for a Chapter 7 business bankruptcy, avoid the means test, and still be able to discharge qualifying debt. First you need to determine if your debts are primarily consumer or business debt.
Business debt arises from the debt you accumulated while trying to earn a profit at your company. However, there’s a loophole in the law that allows personal tax debt and student loan obligations to be considered business debt, which could allow you to qualify as an individual filing for business bankruptcy, which also lets you avoid taking the means test. Again, this area of the law is complex and it’s best to consult with an experienced bankruptcy lawyer first.
What Living Expenses are Allowed After Bankruptcy?
Even when filing for bankruptcy (either chapter 7 or 13), you’re given what’s considered “allowable living expenses” as long as they’re reasonable. These can include expenses all households must take on monthly, including:
- Rent or home mortgage payments
- Utilities like electricity, natural gas, cable TV, internet service and phone service
- Municipal services like water, sewer and trash pickup
- Regular expenses like food, clothing, and laundry
Other expenses that don’t come up monthly might also be allowed, including:
- Medical and dental bills
- Transportation costs like buying gasoline or repairs to your car
- Home maintenance or repairs
- Entertainment costs (in reasonable amounts)
- Insurance bills (homeowners, life, health or car)
- Charitable contributions
- Property taxes
- Child care expenses like babysitting or daycare
- Student loan payments
- Educational expenses required by an employer
- State and federal tax payments
- Union dues
There are also common obligations you can deduct from your expenses on the means test. They can include court-ordered payments such as alimony or child support; the cost of caring for an elderly, chronically ill, or disabled person; and expenses for special circumstances, such as unexpected costs related to your health or high costs after a natural disaster like a hurricane or flooding.
Trust an Experienced Bankruptcy Attorney in Louisiana
When you’re considering this process, a good bankruptcy attorney can help you understand which approach to bankruptcy is going to work best for your situation.
- Orum Young Law has more than 35 years helping the people of Northeastern Louisiana file for bankruptcy and regain control of their finances. In those 35 years, we have filed more than 20,000 cases and experienced unbelievable success. We help our clients understand the basic aspects of their case, including how to determine their expenses and handle any necessary filings.
Contact us today at (318) 450-3192 to schedule your free case review and start protecting your family’s future.