Inflation has steadily increased to record-breaking levels. Consumer prices have seen increases that leave normal folks struggling immensely. All this further drives consumer debt unsustainably high. In an ideal world, increased wages would counterbalance inflation and dampen debts. Ours is an imperfect world. Perhaps financially dystopian. Certainly, wages have increased for many, but not enough to keep pace with rapid inflation and consumer prices. When faced with these stark realities, many people turn to bankruptcy to achieve a financial fresh start. Those with existing bankruptcy cases face hardship as well. These groups share common shared stress about how the current economic climate will impact their bankruptcy cases. This article is aimed at answering those questions.
The first thing to know is that you have many viable options in bankruptcy. To confidently choose whether to exercise those options, you must first understand the mechanics of bankruptcy and the promised relief. First, there are some important concepts to define:
- Current Monthly Income (“CMI”): the average of all income received in the six months prior to filing (see 11 U.S.C. § 101(10A)).
- Median Income: the exact fiftieth percentile of household income by state and family size as calculated by the United States Census Bureau (see 11 U.S.C. §101(39A)).
- Means Test: a required calculation for filers with household income that exceeds the median (see 11 U.S.C. §707(b)(2)). Income in excess of the Median Income creates a rebuttable “presumption of abuse” if the debtor files for Chapter 7.
- “Reasonable and Necessary” Expenses: Expenses including taxes, housing, food, clothing, transportation, and medical, which are necessary for debtors to subsist day-to-day. For over-median debtors, amounts are determined by the IRS National Standards for Allowable Living Expenses (see 11 U.S.C. § 707(b)(2)). For under-median debtors, amounts are actual expense amounts, so long as they are “reasonable and necessary”.
- Exemptions: Codified dollar values available for debtors to protect and keep property from liquidation by the bankruptcy Trustee (see 11 U.S.C. § 522(d)).
- Disposable Income: The amount leftover after your expenses are deducted from your gross income, which could be required to pay to creditors.
Next, we turn to discussing consumer options for bankruptcy protection. Consumers generally have two options for bankruptcy protection: a Chapter 7 Liquidation or a Chapter 13 Reorganization. The goal is a “discharge,” which eliminates debts forever after. The process differs between bankruptcy chapters. A Chapter 7 Liquidation is quick – usually about three to four months from the time of filing – and allows you to discharge your debts rather immediately. In a Chapter 7 Liquidation, if you have non-exempt property, then the Trustee will take that property, sell it, and distribute the proceeds to creditors. Alternatively, a Chapter 13 Reorganization is a repayment plan over three to five years. You will make a once-monthly payment to the Chapter 13 Trustee, who then makes payments to creditors. The starting point to determine your required monthly payment will be your Disposable Income. With a few exceptions that I detailed in a recent article titled “Public Policy and The Bankruptcy Discharge: A Discussion On Non-Dischargeable Debts” remaining unsecured debt remaining at the end of your Chapter 13 will be discharged and your obligation forever extinguished. The most immediate question is then what chapter of bankruptcy you qualify to file.
The threshold is the “Median Income”. If your household income is less than the household median income for your state, you presumptively qualify for either Chapter 7 or Chapter 13. If your household income exceeds the threshold, the Bankruptcy Code makes a rebuttable presumption that you would be “abusing” the provisions of Chapter 7. This presumption is rebuttable if your expenses show sufficient indigence. If you cannot overcome the presumption, you will be disallowed from filing under Chapter 7. In summary, if your household income is below the threshold, then you are presumptively eligible to file under either Chapter 7 or Chapter 13. If your household income exceeds the threshold, then you are presumptively ineligible to file a Chapter 7 and may only file a Chapter 13. The question then becomes how bankruptcy may alleviate these inflationary and economic stressors.
In these uncertain economic times, I am frequently asked if it is still worthwhile to file for bankruptcy protection when wages are increasing and property valuations are at all-time highs. In short, yes. While those things are true, so is the corollary. Consumer prices, interest rates, and debt balances are at all-time highs. For prospective filers, the impact is still unravelling. We will not know the full extent until the economy fully course-corrects. Consult a qualified attorney who can analyze your unique situation and tailor a solution. For current debtors, the most important thing is not to fret. You hired an attorney for a reason and you should continue to rely on that attorney’s advice. Reach out to your attorney if you have concerns or other life changes that make your situation less-than-affordable. If you filed the case pro se (i.e. you represent yourself), consider consulting with a qualified attorney. A bankruptcy without a discharge is, after all, nothing but wasted time and wasted money.
We live in uncertain economic times, replete with highs and lows. When your financial lows get too low, bankruptcy is a valid and comprehensive solution. If you are currently in a bankruptcy and experiencing further lows, help is still available. A dedicated attorney will help guide you through every step of the process. The experienced, proven, and trusted bankruptcy attorneys at Mooney Law stand ready to assist you and answer your questions. Consultations for bankruptcy are always free at Mooney Law. To schedule a FREE consultation, call us today at 717-632-4656 or 717-200-HELP. You can also visit the firm website at https://www.mooney4law.com.
