Chapter 7 or Chapter 13?

I recently had a new client who wanted to wipe out about $50,000 in credit card debt. I told him the best way to do it would be to file a Chapter 7. He doesn't own a house (it's in his wife's name), and he is a gig worker and only makes about $10,000 a year. I figured he had an easy chapter 7 case, but a couple of minutes later I learned that his wife makes about $140,000 a year, and that radically changed the equation. Even though he was the only one that was going to file for bankruptcy, the law says we have to include the wife's income also, and when you have a spouse that makes that kind of money, it makes it harder to file for Chapter 7.

Another factor we needed to determine was the budget. Based on their income and expenses, was there enough money at the end of the month to make a substantial payment towards his credit card bills, or did he barely have just enough to cover the reasonable and necessary essential monthly expenses?

He was supposed to come in to see me and talk about all of this, and I was thinking it would probably take me at least 30 to 45 minutes to explain all of the rules to him about when you can file a chapter 7 and when you need to file for a chapter 13. And after I did all of that, he still probably wouldn't understand all the things I told him, and he might even be more confused than ever.

Then I started to think why don't I just put all of the stuff on paper, and I could give it to him and he could take his time to read it all. And if it worked with him, I could use the material for future clients that had a similar situation.

So I sat down for about an hour and typed up the following information for my client. My goal was to try to give as simple an explanation as possible as to when it would be smart to file a chapter 7, and to analyze certain situations where it would not be a good idea to file for chapter 7. Therefore, with just some very minor modifications, here's the paper I prepared for my client to review and approve.

Can We File Chapter 7 or Do We Have to File Chapter 13?

Usually, the best case scenario for our clients is to file a chapter 7 bankruptcy. The great benefits about a successful chapter 7 include the following:

1. All of your debts are usually wiped out (except for child support, alimony, court fines, restitution, student loans, and debts incurred by fraud, etc).

2. Examples of debts you can wipe out and other benefits you can get: credit cards; personal loans; medical and hospital bills; pay day loans; utility bills - gas, electric, telephone, Comcast; old income taxes; surcharges on your drivers license; balance on car repos; legal bills, old rental bills, release of obligation to pay mortgages (this one is a little tricky, and we can explain that to you if you have any questions); release of obligation to pay car payments (if you give the car back), stop lawsuits against you; stop wage garnishments; wipe out bail bonds you signed for; stop sheriff's sales, release frozen bank accounts.

3. You keep your home, your cars, your money, your personal possessions, your retirement accounts, etc.

4. The case is completed, and you get your debts discharged (wiped out) in about 4 months.

5. Chapter 7 costs a lot less than Chapter 13.

But Not Everyone Can Qualify to File Chapter 7

1. There are important rules that restrict and limit the ability of some people to qualify for a successful chapter 7.

2. Some of those rules involve the following issues:

   1. the amount of money that the client makes a year, based on family size

   2. the amount of money the client's spouse makes a year, based on family size

   3. the value of any real estate owned by the client, and the balance due on any mortgages on real estate owned by the client.

   4. an analysis of the reasonable and necessary monthly income and expenses of the client, based on certain guidelines and standards.

Based on our preliminary analysis of your situation, it is too early to determine whether we can successfully get you qualified for a chapter 7. We need more information and documentation please.

We Need to Analyze the Monthly Expenses for You and Your Wife

We are giving you a copy of Schedule I and Schedule J - these are actual documents that have to be filed with the Bankruptcy Court. We need this information to see if you can qualify for Chapter 7.

Let me explain to you how and why this is important. I'm going to make up some numbers for the purpose of this illustration.
Let's assume our goal is to wipe out all of your credit card debt. We therefore have to show the court that when we look at your household income and expenses on a monthly basis, there is no money left at the end of the month to make any payments at all on your credit card bills.

Let's be specific here. Let's assume that you need $500 a month to pay your minimum credit card bills. Let's also assume that both of you make a total of $5000 per month take home pay.

In order to meet the income/expense requirement for chapter 7, we have to demonstrate the following:

1. We have to prove that your income is in fact $5000 per month. That involves schedule I

2. We have to list all of your reasonable and necessary monthly expenses. This involves Schedule J.

3. The expenses have to be reasonable based on your family size and other standards and guidelines. For example if you have a household size of 2, the court is not going to permit you to claim that you spend $1000 per month for food.

4. In this example, if you want to qualify for chapter 7, your expenses in Schedule J will have to be at least $5000 per month (you will not be listing your credit card expense in schedule J - you want to clearly demonstrate that you don't have the ability to pay any of the credit card debt at all).

5. So when we fill out schedule I and J, if you make $5000 a month, and you spend $5000 a month for your mortgage, car payments, utilities, and all of those other expenses listed in Schedule J, then it shows you don't have any money left to pay for the credit cards, and there is a good chance we can get you into Chapter 7.

6. On the other hand, what happens if you make $5000 a month, but your normal expenses are only $4500 per month? That's not a good sign for Chapter 7 because it shows that you have $500 left at the end of month. Therefore you have a surplus, and the court would probably say that you should pay back some money to your creditors. In this example, since you have $500 left at the end of the month, the Court would probably want you to pay $500 per month towards your credit card debt. That means you would need to file a chapter 13 instead of a chapter 7

7. SO HERE'S THE IMPORTANT POINT - If your expenses (not including your credit card payments) are equal to or more than your income each month, that's a good sign that we can do a chapter 7 if you meet the other necessary qualifications. If your expenses (not including your credit card payments) are less than your income each month, that's a bad sign for trying to do a chapter 7.

8. We can give you a lot more information once we see and review your wife's paystubs, and once we review your budget based on the way you complete schedule I and J for us. END OF MEMO TO CLIENT.

I realize that all of the above might be a little difficult to understand, so if you'd like to ask me some specific questions about this, and you want to know more about chapter 7 and chapter 13 and what's best for you, feel free to call me. I always offer a totally free consultation, and I just concluded one earlier this afternoon where I spoke to a potential new client from Atlantic City for about 90 minutes. It looks like she's going to retain me to do some debt settlement for her (she's got way too many assets to file for bankruptcy), and she even gave me a pretty great Google review.

Thank you. We wish you all the best - Seymour Wasserstrum - Your Underdog Advocate