What are my options if I can't file for Chapter 7 bankruptcy?
UPDATED: June 19, 2018
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Several options may still be available if filing under Chapter 7 is not an option. You may look at another type of bankruptcy or pursue non-bankruptcy options to working through debt. See our section on bankruptcy alternatives here.
Chapter 13 Is an Option
Chapter 13 requires consumers to submit a repayment plan for confirmation by the court. Among other things, the plan must commit all of the debtor’s disposable income over the course of the plan. Formulating a Chapter 13 plan is best done with the help of an attorney, but there are some general guidelines that will help a consumer understand what their lawyer will be doing.
Another Option: Chapter 11
Consumers whose debts are too large for Chapter 13 might file under Chapter 11. In general, a Chapter 11 case involves the formulation of a plan and a disclosure statement that the debtor submits to a vote by creditors. The complexities of Chapter 11 are beyond the scope of a simple online explanation like this one. Someone who is not an experienced bankruptcy lawyer can probably not successfully handle a Chapter 11 case.
A Third Option: Chapter 12
Family farmers can file under Chapter 12. Chapter 12 is much like Chapter 13, but is available without regard to the size of the debts.
The Chapter 13 B22C Form vs. Chapter 7 Means Test
A Chapter 13 petition includes a form (B22C) that’s very much like the means test used in a Chapter 7 case. The form first directs the debtor to calculate Current Monthly Income (CMI) in exactly the same way. The CMI of the debtor(s) and the non-filing spouse are then compared to the state median income for same-sized households to determine the so-called “commitment period.” The commitment period is either 3 years (below median) and 5 years (above median). Some consumer bankruptcy lawyers believe that the commitment period is just a number that doesn’t necessarily govern how long the plan will actually last, but there is no case law deciding this point one way or the other.
The B22C form then directs a married debtor filing individually to subtract out the non-filing spouse’s income to leave an adjusted CMI that includes (a) the debtor’s income, and (b) the non-filing spouse’s contributions to the debtor’s household expenses. If the result is above median, the debtor must go on to calculate disposable income according to a statutory formula. Otherwise, the debtor will stop filling out the form and calculate disposable income as under prior law (that is, by subtracting actual expenses from Schedule J from actual net income from Schedule I, subject to the scrutiny of the United States Trustee).
The statutory formula for disposable income for above-median filers applies the same complicated set of deductions as does the Chapter 7 means test, plus two more. In addition to the expenses that are deducted on the B22A form, the B22C form allows a further reduction in income for (a) income received for child support, and (b) voluntary contributions to retirement plans. As a result, it is entirely possible for a debtor to have negative disposable income (meaning that no Chapter 13 plan is feasible) and yet have the presumption of abuse arise in a Chapter 7 filing. In the absence of case law under BAPCPA, it is not entirely clear what chapter such a debtor should file under.
Expense figures to be used in figuring disposable income are derived from the collection standards used by the IRS in tax delinquency cases. The values to be used on the bankruptcy forms are at http://www.justice.gov/ust/eo/bapcpa/meanstesting.htm.
Even though you hire an attorney for bankruptcy advice, also explore non-bankruptcy options with your attorney. Even though credit counseling organizations have received bad press as of late, your attorney may know of local counseling organizations or has his/her own in-house division to assist you with debt settlement options outside of bankruptcy.