Question: I am considering obtaining a loan from a bank. I plan to use the money from this loan to consolidate other debt, including student loans and credit card balances. I own a car that is paid off, but I have no other assets. My primary expenses are my monthly payments for car insurance, a cell phone, and rent.
If I lose my job, will I be able to file for Chapter 7 bankruptcy to wipe out the loan from the bank?
Would doing so mean I have to stop paying for my auto insurance, cell phone, and rent to demonstrate that I have no funds to keep paying on the bank loan?
BankruptcyCaseReview Answer: When someone is looking to file for Chapter 7, the primary factor used to determine if the person can file for this type of bankruptcy is the means test.
The means test is a formula that evaluates your income and certain expenses to determine if your financial situation is truly dire enough to warrant the power given by the Chapter 7 bankruptcy. This test ensures individuals who are too wealthy do not qualify for Chapter 7 bankruptcy and thereby use the debt cancellation power to eliminate debt the person can actually afford to pay.
In general, the means test considers the following factors. However, you should consult a bankruptcy attorney who is familiar with bankruptcy laws of your state if you are considering filing Chapter 7 bankruptcy.
1. Military and Non-Consumer Debt
If you fall into one of these three categories, you are excluded from taking the means test and qualify to file Chapter 7 bankruptcy:
- Disabled veterans
- Debtors whose debts are primarily business-related debts
- Members of the National Guard or the reserves
2. Monthly Income
Monthly income includes all of your income and your spouse’s income if your spouse is filing bankruptcy as well. Income for purposes of bankruptcy includes hourly wages, salary, tips, bonuses, commissions, overtime pay, business income, rental income, interest, dividends, pension, child support, and unemployment.
3. Median Income for Applicable State
The Department of Justice maintains the average family income for each state. If your annual income is greater than the median income for your state, the means test takes a more thorough look at your income and expenses to determine if you qualify to file Chapter 7. If your income is less than the median income for your state, you will qualify to file Chapter 7.
4. Allowed Deductions from Income
The Department of Justice likewise maintains allowable deductions for bankruptcy purposes based on family size. Allowable deductions include amounts for food, clothing, health care, housing, utilities, transportation, taxes, life insurance, child care, secured debt payments, and other permitted living expenses.
In summary, the above means that the government has defined what constitutes reasonable living expenses across all categories. By using a standard allowance for expenses, the means test ensures a bankruptcy applicant does not inflate their expenses in an attempt to justify their qualification to file.
In addition, if you have recurring payments for reasonable expenses such as a cell phone, auto insurance, or rent, continuing to make those payments will not in and of themselves disqualify you from Chapter 7 bankruptcy. However, it is worth noting that filing bankruptcy will automatically terminate some agreements such as cell phone contracts unless the applicant reaffirms the contract with the provider.
If you choose to file for Chapter 7 bankruptcy and you qualify, it is important to remember two other points.
First, remember that a Chapter 7 bankruptcy will appear on your credit report for 10 years. Although over time you can take steps to re-establish good credit, virtually any service or product you apply for during that time where you must make a monthly payment will likely require an upfront deposit to protect them from the risk of working with you. This can include apartment or home rental applications, car loans, home loans, cell phones, utilities, and other types of payments.
In addition, your credit report may also be reviewed when you apply for certain jobs. Therefore, having a Chapter 7 bankruptcy on your credit may make it more difficult to obtain a job to help you get back on your feet.
Second, it is important that you be honest when filing for a Chapter 7 bankruptcy and that you list all of your assets and expenses accurately. If the bankruptcy trustee finds that you have intentionally mislead the bankruptcy court about your financial position by omitting income, bank account balances, or cash, the court can dismiss your bankruptcy filing entirely. In addition, you will not be permitted to re-file for a Chapter 7 bankruptcy for 180 days.
Likewise if the bankruptcy trustee finds that you have obtained debt (such as a bank loan) that can be eliminated as a part of a bankruptcy in an effort to pay off debt that typically cannot be discharged through bankruptcy (such as student loans), the bankruptcy court may reinstate that non-dischargeable debt.