When to file?

[Wunsche]

I don't currently qualify for Chapter 7 due to my above median income. If I move forward with a Chapter 13 bankruptcy, my DMI is about $500 or less.

I don't live in a good area of town and it can be unsafe here at times. The rent is cheap, though (less than half the IRS standards for the area).

I'm considering moving to a better and safer area. That means that my rent would probably go up by at least $500 (maybe even $1,000).

What would happen in this situation? Say that I rent a new place, my rent goes up by $500 or more, and my new DMI is $100 or less.

Would I still be required to file for Chapter 13 rather than Chapter 7?

Would moving a month or two before filing for bankruptcy be considered fraud?

Thank you for your help!

[bcohen]

Chapter 13 bankruptcy is a useful tool for people who have secured debt attached to property which they wish to keep, or have certain kinds of non-dischargeable debt which they wish to pay off over time. However, for people who have nothing but unsecured debt, and are only being pushed into a Chapter 13 because of the "means test", Chapter 13 is a waste of money. Reducing income and/or increasing allowed expenses in order to pass the "means test" and file Chapter 7 instead would be better.

In order to give the best advise, we would need to know the approximate amount and type of your debts, and whether you have been sued, or are being sued. However, it sounds like your idea to move to a safer neighborhood and increase your rent expense is a good one. Keep in mind though that the "means test" looks back over a 6-month period, so you would need to live in the more expensive apartment and pay the higher rent for 6 to 7 months before filing.

[keepmine]

The means test deals with income and looks backwards.
Schedules I and J {income and expenses} are forward looking and that's where the housing costs will go. As long as a lease is inplace and you're paying at the higher rate prior to filing I don't think you'd need to wait as long as 6 months.
The best time to file is when the bk will give you the most benefit. If there is no real urgency {lawsuits and/garnishments in place} then take your time and set it up.

[LadyInTheRed]

The OP's rent is below local standards. Increasing rent will only help to pass the means test if the new rent is above the local standards because the OP will be allowed to use the local standards on the means test even if his/her rent is not that high. If the OP can pass the means test some other way, then having higher rent can help avoid an objection based on totality of circumstances that could be an issue if the rent on Schedule J is so low that it shows enough DMI to fund a Chap 13.

Wunsche, if you are going to move anyway and will file a Chap 13, moving before filing is a good idea so that your DMI on Schedules I/J, and therefore your plan payment, will be lower. But, be sure you can afford your new rent in the long run.

However, for people who have nothing but unsecured debt, and are only being pushed into a Chapter 13 because of the "means test", Chapter 13 is a waste of money. Reducing income and/or increasing allowed expenses in order to pass the "means test" and file Chapter 7 instead would be better.

Decreasing your income to pass the means test is short sided unless you are working lots of overtime or multiple jobs only to pay off debt. I agree that if somebody can make adjustments to expenses or wait for their already reduced income in their 6 month look back to drop so that they pass the means test, it is preferable to a Chap 13 if you don't have assets to protect. But, I disagree that a Chap 13 is always a waste of money for those who file only because they can't pass the means test. Somebody who has a lot of unsecured debt and is paying interest rates in the double digits and only able to make minimum payments on their credit cards can get a huge advantage from filing Chap 13. You pay what you can for 5 years and then your unsecured debt is gone. Even if my 2nd mortgage wasn't being stripped, Chap 13 would have saved me from paying off credit cards for the rest of my life. I would have bought the same car before filing and paid the same $30K in plan payments over 5 years. $17K would pay off the car, $3500 would go to attorney fees and the rest to the trustee and unsecured creditors. For the $30,000 that would have gone to unsecured creditors even if I weren't in Chap 13, I would receive a discharge of over $50K in unsecured debt and I would emerge from Chap 13 with a 5 year old gas efficient car. Without Chap 13, at the end of 5 years, that $30K would not have even covered my interest payments and I would still have a 15 year old gas guzzler.

[Wunsche]

Thank you very much for sharing your thoughts with me!

I've started to look for a new place and will try to move before I file. Besides, it might be hard for me to find a new place after I file.

I currently live right on the edge of a bad area of town. My building is okay, but because of where it's located, I constantly have issues with the neighbours. If you walk a block down the street, this area can get very "ghetto" and unsafe (with all the respect). It's not uncommon for me to come home and have furniture, couches and trashes from neighbors piled up in my parking spot. People around here walk their dogs and don't always clean up after them. You have to constantly be looking at the ground. There is no respect or sense of community. They also feel entitled to my parking spot without asking. I come home sometimes and have to call the cops or the tow truck to be able to park in my own spot. Some of the people in the buildings around me are drug dealers and it's not uncommon for the cops to be there arresting them. We've also had people break into the building.

Anyway, I'm getting tired of dealing with all of this and don't honestly think I can wait another 5 years before moving. I'm seriously considering getting a nicer place in a better part of town. This would certainly mean an increase in my rent.

According to IRS standards, the average monthly rent for this area is $1850. I currently pay $975.

If I can find a better place, I'm thinking that my new rent will be at least $1500 or $1600 montly.

Here is the issue: I currently pay over $2,400 in debt repayment every month. According to one of the lawyers who I spoke with, my Chapter 13 payments would be about $550. If my rent goes up by $500+ (the utilities would probably go up as well), then all of the sudden my DMI drops to less than $100. Would I have the right to file Chapter 7 at that point? I've read that if the DMI is $166 or below, I might be able to file Chapter 7 even if I have above average income.

Has anyone had a similar experience?

Since I'm going to file for bankruptcy anyway (I would never be able to pay off my debt otherwise), should I stop making credit card payments, even while I'm looking for a new home?

I've never missed a payment in my life, so stopping paying my creditors makes me nervous. On the other hand, I don't see a point in continuing to pay if I'm going to file anyway. How long until they start suing me? How much time do I have to file once I stop making payments?

My other question is about my car. It's currently underwater by at least $5k. The attorneys who I spoke with said they could include my car in the bankruptcy case. Do you recommend doing that?

Thank you again!

[keepsmiling]

Sounds like moving, for you, is a no brainer! Get out there tomorrow and start looking, while your credit is still good

It would be helpful, as bcohen said, for you to tell us "In order to give the best advise, we would need to know the approximate amount and type of your debts", in order for us to advise you further. Safe to assume you are a single person?

Get yourself situated and then start thinking about dropping those cc payments. Also....sometimes it pays to buy a new car to get yourself into a Chapter 7. Many here have done exactly that.
As to including your car in the bk... if you have a new car, with little equity, that puts you into a better position in a 7. Or if you do wind up in a 13, yes may well be able to save a lot of interest by cramming down the value and utilizing the till rate... but we aren't quite up to that yet. And anyway, you don't get to pick and choose which debts you include in either chapter

Good luck, keep asking good q's!

[Wunsche]

Thank you for your comments, keepsmiling!

I have about $91k in unsecured debt, $18k in an auto loan and $1,100 in student loans.

Not something I'm proud of.

[keepsmiling]

Income/number in family?
sounding like a good candidate so far...even if you do wind up in a 13, the amount you'd have to repay could be nominal. That's what smart planning and good lawyers are for.
No matter of pride here....we are all in the same boat. Pride keeps us from acknowledging reality and from getting out of debt. BK is a legal tool, which "better" people than us often use (think Donald Trump and a long list of other luminaries)...so don't even go the shame route.

[LadyInTheRed]

Yes, moving sounds like a no brainer.

To help determine whether you can pass the means test, use the calculator at: http://www.legalconsumer.com/bankruptcy/means-test/

With $2,400 in debt payment each month, even a $500 plan payment should be a relief if you end up in a Chap 13.

If you have decided you are going to file BK, move and stop paying your unsecured non-dischargeable debt asap. Otherwise, you are just throwing money away. You will have at least 90 days after default before anybody sues you. Many people go much longer than that before they are sued.

Are you familiar with California's bankruptcy exemptions? If not, read my blog (I'm not sure the links are current, so confirm what you read as some of the exemptions adjust periodically). Since you don't own a home, System 2 is most likely the better option for you. There is a generous wildcard exemption that will allow you to exempt a nice chunk of cash. You can stop paying your credit cards and save cash for your attorney fees and then build a savings that will help get you through a Chap 13 or help in your post Chap 7 fresh start.

[keepsmiling]

It might be a good idea to pay off your student loan, since it's such a small amount.
You can't discharge it, and sometimes wacky stuff happens to them when you file.

[Wunsche]

Income/number in family?

I currently make $84,000 a year and have $91,000 in unsecured debt.

I'm not married and don't have any kids or dependents.

Thank you again!

[Wunsche]

Hi LadyInRed,

I don't qualify for Chapter 7 because of my income.

But I've read that if I have $100 or less in DMI, I may still be able to file for Chapter 7.

I'll stop making payments on my credit cards and keep paying my car and my student loan only. I'll try to pay off my student loan as soon as possible.

I'll read your blog and try to understand what system 2 means.

Thank you very much, everyone!

[LadyInTheRed]

Your income is only the first step in determining whether you qualify for a Chap 7. If your income is above median, you complete the rest of the means test. Did you try the link I provided?

[Wunsche]

Your income is only the first step in determining whether you qualify for a Chap 7. If your income is above median, you complete the rest of the means test. Did you try the link I provided?

I did. Here is what it said:

"You Pass the Means Test Because the amount on Line 51 is less than the amount on Line 54, the presumption of abuse does not arise. You can file for Chapter 7 or Chapter 13 Bankruptcy."

It says that my 60-month disposable income is $ 6,836, which means a monthly payment of approximately $114.

I'm not sure if I entered my numbers 100% accurately, but I did my best to do so.

On the other hand, one of the attorneys who I've been speaking with sent me this:

"If your rent goes up your chapter 13 payment can go down. However, when determining whether you qualify for the Ch. 7, we have to do the means test. "DMI" is your disposible monthly income on the means test. The numbers we use on the means test are IRS standards, so we are not taking your actual rent into account when doing the means test, and it still is saying you have too much DMI for the chapter 7. So, if your rent went up, it would not effect whether you could file Ch 7 or not, but it would affect your payment in a Ch. 13."

[keepsmiling]

Frankly at your income for one person I am surprised your dmi is showing up so low. Are you paying for your own health insurance? What is your current car payment? You aren't including your unsecured debt payments in the calculation, right?

Often members will post their expenses here and we can help tweak them. I'd venture a guess you are in fact in 13 territory. But you should still move! We can discuss whatever else is necessary to keep your payments reasonable.