The changes made still allow for consumers/individuals to seek bankruptcy protection, but now require, among other things, debtor counseling before and after filing for bankruptcy and “means testing” to qualify for Chapter 7 protection.
While there are other Chapters dealing with business bankruptcies, most people facing a decision of whether or not to file bankruptcy based on mounting medical bills from a cancer diagnosis, will be considering Chapters 7 and 13 –the most common bankruptcy protections for individuals/consumers— consequently, for the purposes of this website these are the only two Chapters that will be discussed.
The information provided here is only intended to provide you with some background information, it is not intended to provide you with all of the information or calculations you would need in order to determine if filing for bankruptcy is your best option. In some instances, bankruptcy may not be your best option. The advice of an attorney, based on the specifics of your individual situation can help you make that determination.
Bankruptcy is a process in the federal court system to help consumers and businesses eliminate or repay their debts.
Often times it is not. A bankruptcy attorney can review the specifics of your particular situation and advise you as to the pros and cons of possible options.
Generally, yes. Usually, medical bills are “unsecured debt”, similar to credit card debt, meaning that it is a debt that is not backed by a pledge of property or assets (like your home or car). For this reason, the best course of action may be to resist taking out a home equity, or other "secured" line of credit to pay-off medical bills. The result of doing so would be to change the status of the otherwise unsecured debt to secured debt which may not be dischargeable in bankruptcy proceedings.
Generally public benefits are protected even if you choose to file for bankruptcy. To ensure that they remain protected once these benefits are paid to you, it is widely suggested that you deposit them into an account that is only for your Social Security payments. By avoiding co-mingling these funds with other income or money you have, they will remain “identified” as Social Security benefits and thus, generally protected.
Under the new law, the calculations for determining whether or not you are permitted to file for Chapter 7 are very complicated. The following will give you a way to determine generally where your income falls in relation to the Chapter 7 requirements, but you are encouraged to seek the advice and assistance of an attorney if you are considering filing for bankruptcy.
If your income is too high, you will not be permitted to file for Chapter 7. With the new changes in the law, you must first figure out what your current monthly income is and measure it against the median income in your state for a family of your same size. Note that the your current monthly income is not measured at the time you file for bankruptcy, but rather is your average income for the six months prior to filing. If you are contemplating filing for bankruptcy because you have suffered a job loss within the last six months due to your cancer diagnosis, your ‘current monthly income’ for the purposes of satisfying this aspect of the new law will no doubt be higher than what your actual monthly income is by the time you might be filing for bankruptcy protection.
To find the median income for your family size in your state, go to www.usdoj.gov/ust and click on the link for “Means Testing”. You will find information for Minnesota listed under Section 1, “Census Bureau Data”
If after comparing the two figures, your monthly income is less than or equal to the median, you can elect to file for Chapter 7 relief.
If it is more than the median figure for your state and family size, the new law requires that you now must pass a “means test” to determine whether or not you have enough disposable income to make payments under a Chapter 13 plan. You are permitted to subtract certain expenses such as food, clothing and certain household and miscellaneous expenses, but note that the amounts you are permitted to deduct for these items are amounts set by the IRS based on income guidelines, not the actual amount your family spends. You are also permitted to subtract the monthly amounts for payments that you have to make on “secured” or “priority” debts. Secured debts are those secured by real property (like your home) or personal property (like your car) that the creditor is entitled to seize or repossess if you do not make your payments. Priority debts are usually debts that are not dischargeable in bankruptcy such as child support payments, alimony, and tax debts. If your total monthly income is less than $100 after subtracting these amounts, then you may file for Chapter 7.
If your total monthly income is more than $166.66 after subtracting these amounts, then you did not pass the means test and may not file for Chapter 7 relief, but may be eligible to file for Chapter 13.
If your monthly income falls between $100 and $166.66, then you must determine if with the remaining amount of monthly income you can pay more than 25% of your unsecured, non-priority debts (meaning medical bills, student loans, credit cards for example) over a five-year period. If so, then you do not qualify for Chapter 7.
A major change in the new law was the requirement that those seeking bankruptcy protection attended credit counseling both before and after they file for bankruptcy. In fact, you will not receive your final discharge from the bankruptcy court until you submit proof of fulfilling this requirement. The reason for this new requirement is to help people determine whether or not they really need to file for bankruptcy or if another option, such as an informal repayment plan, would work a better result for you.
Click on the following link for a list of approved Credit Counselors for Minnesota.
Note that many of those listed provide service via telephone and Internet and are located throughout the country, but there are several listed within Minnesota that also provide counseling in person throughout the state.
Chapter 7—is called a “liquidation bankruptcy” in which a consumer seeks to have the bankruptcy court to discharge most of the debts that the individual consumer owes. To do this, the bankruptcy trustee (a person appointed by the court to oversee the case of a person who has filed for bankruptcy) can sell any non-exempt property, distributing the proceeds of their sale to your creditors. Property that is exempt from being sold in this manner includes among other things, the following, up to a certain dollar amount: your home, some personal property, household furnishings, tools of trade, a motor vehicle and employee & retirement benefits.
New changes in the law now require that consumers with income higher than the median income for a family their size, in their state, are no longer allowed to file under Chapter 7 if their disposable income (income remaining after paying for certain allowed expenses and debts) would allow them to repay some portion of their unsecured debt over five years.
•A popular choice among those who qualify for it, as it does not require you to repay any portion of your debts.
•Will not help you keep your home safe from foreclosure if you are behind on your mortgage payments unless you make up for the entire past due amount right away and the equity you have in your home does not exceed the amount of the exemption available to you.
• You can’t receive a discharge under Chapter 7 if you have had a Chapter 7 discharge in the last 8 years or a Chapter 13 discharge in the last 6 years.
Chapter 13—is usually referred to as a “reorganization bankruptcy” in which you file a plan with the court, proposing a repayment plan over a term of three to five years in which you will repay your creditors for all or part of your debt. The amount you will have to repay is dependent upon the amount of money you earn, how much you owe to creditors and how much your unsecured (for example, credit card) creditors would have received if you had filed under Chapter 7. In order to file for Chapter 13, you must have a source of income which is reliable that can be used to repay at least some portion of your debt. There are also specific limits as to how much your unsecured and secured debts may be in order to file for Chapter 13.
• Unlike Chapter 7, you do not have to give up any property to be sold to satisfy your debts as you will be working out a repayment plan.
• Chapter 13 was designed to help stop foreclosures. When you file under Chapter 13 (rather than Chapter 7) the bankruptcy proceeding stops the foreclosure and can require the lender to accept your repayment plan.
•You may have to repay a portion of your unsecured debts—like your medical bills—but once your repayment plan is complete, any remaining amounts owing will be discharged and you will not be required to repay any more toward them.
• All of your disposable income (income remaining after paying your living expenses) must be put toward your repayment plan. A change the new law brought about now does not use your actual living expenses, but the IRS dictated expense amounts if your income is higher than the median amount for your state. Often times these IRS amounts are less than what your actual expenses might be.
• You can’t receive a discharge under Chapter 13 if you have had a Chapter 7 discharge in the last 4 years or a Chapter 13 discharge in the last 2 years.
It really depends on a host of specific factors --what your goals are for seeking bankruptcy protection, the type and amount of debt you have, your income, and other factors. To determine if bankruptcy is your best option, and if so, which type is best for you is best determined by you with the help of an experienced bankruptcy attorney.