New to BK

[laurannm]

Hello everyone!

My family and I are going to be entering the world of BK, and this forum has been a life-saver for us. I have learned a tremendous amount from this board Just a little about myself:

We are a family of 5, and currently our income is above the median in our state (MA) by about $2500 (income is approx. $100k). We have in excess of $110k in unsecured debts (no luxury items, simply robbing Peter to pay Paul each month). we are under water on our house, have a car lease that began in Dec. and a 2nd car loan. we definitely want to keep both cars and the house, and can afford the payments post BK.

We have consulted with several attorneys and the one we have chosen has crunched some numbers for us. According to her calculations, we would pass the means test and show negative income on our schedules I & J (negative by about $25 each month).

So it appears that we can file for chapter 7, but my question is, has anyone been in or heard of a situation where the debtor showed negative income, yet once everything was looked at by the trustee, you are forced into a 13 (because the trustee adjusted expenses)? Is it possible to not have enough disposable income for a chapter 13, and still not be eligible for Chapter 7?

My attorney believes none of the expenses we are showing throw up a red flag, particularly with a family of 5. The thought of chapter 13 scares me a bit :-)

Thanks in advance!

[HHM]

Those questions are quite specific to your local area, so your attorney is in the best position to say whether the local trustees and local US trustee will object to your expenses.

Generally speaking, the law only requires that you have at least $100 per month in disposable income and then you can be pushed into a chapter 13 (assuming that is in the best interests of creditors). I would guess that MA is fairly expensive state, especially if you are in the Boston area, so you are probably ok.

[laurannm]

MA is definitely an expensive state, and we live about 30 mins south of Boston.

One other question...as I mentioned we are significantly upside down on our house (roughly $80k due to the market drop). However the payments would be very affordable post Chapter 7 and we definitely want to keep it. I sort of understand how reaffirmation works...is there any reason why a trustee\judge would not allow you to reaffrim your mortgage (or auto loan for that matter)? We are current on all payments

Thanks again!

[diviaruba]

Hello everyone!



So it appears that we can file for chapter 7, but my question is, has anyone been in or heard of a situation where the debtor showed negative income, yet once everything was looked at by the trustee, you are forced into a 13 (because the trustee adjusted expenses)? Is it possible to not have enough disposable income for a chapter 13, and still not be eligible for Chapter 7?

The 100/100 combo ($100K income, over 100K unsecured) is going to be a killer, and will invite special scrutiny from the UST. While the expense figures may be "reasonable", $25 negative is an awfully small margin that can vanish with just one questionable expense deduction. Taxes, in particular, invite a lot of scrutiny, as they are the most easily manipulated (do you over or under withhold) and among the least settled issues surrounding the means test (what are taxes actually incurred - is it the withheld amount over the six month look-back, or half of your true annualized tax liablility?). I would run the means test using only the standard IRS amounts and secured debt payments (no extras like home energy or education expenses) and see where you wind up. Chances are, if you are that close, they will try to find a way to check the box that "presumption of abuse does apply", and attempt to force dismissal or conversion.

[laurannm]

Yep, our attorney had mentioned that we would most likely be audited due to the income\debt figures. She seemed to indicate though that they would be primarily looking for luxury items purchased in the past year, for which we have none. Would they simply dismiss it outright, or just convert us to a 13 (or is that one and the same)?

We did run the means test with just the IRS standards and taxes actually incurred (based on our 2007 tax return). I did though use health insurance premiums and mandatory deductions (I work for the state of MA and thus I have pension deductions which are mandatory), along with my health care spending account and still passed. The -$25 did not include auto insurance or a new car payment which we just recently picked up. Those expenses would then put us at around negative $300 per month on the I & J.

I had mentioned the tax issue to my lawyer, and she brought up a good point though....lets say you were filing mid-year. How would you know what your actual taxes incurred would be during the past 6 months, since obviously your taxes for that year wouldn't have been done yet?