Do I have enough debt to file for bankruptcy?

Do I have enough debt to file for bankruptcy?

There is no minimum threshold amount of debt to be able to file for bankruptcy. My personal recommendation is that it’s probably not worth it for a debt amount under $5,000. If you have debt over $5,000, your minimum monthly payments are causing you a hardship, and you have been paying high interest and minimum payments with little, or no progress in reducing the principal amount of the debt you are a potentially good bankruptcy candidate.

There is no maximum amount of debt to file a Chapter 7, so that amount can be unlimited. If you have hundreds of thousands of dollars in debt, be assured that the trustee will ask how that money was spent. Some people have over hundred thousand dollars just in student loan debt alone. Even though there is no debt limit to file a Chapter 7, there are income requirements which should be addressed during your consultation. Our first analysis is whether you will qualify for a Chapter 7.

There are caps on debt in a Chapter 13 case which might seem illogical because you are actually paying your creditors, through the trustee for 36-60 months and in a Chapter 7 you are not making a monthly payment to the trustee. For a Chapter 13 you are permitted to have $465,275 in unsecured debt. Unsecured debt includes credit cards, personal loans, medical debt, and student loan debt.

You are allowed to have up to $1,395,875 in secured debt which would include items such as a home mortgage or financed vehicle.

What types of income are counted in the means test?

What types of income are counted in the means test?

There are certain income qualifications for a Chapter 7 bankruptcy. Social security income, including social security disability does not count as income on the means test (the test on the bankruptcy petition that determines which chapter of bankruptcy you qualify for). Similarly, veteran disability benefits do not count as income. For example, if you are receiving social security or veteran disability benefits you could make an unlimited amount per month and still qualify for a Chapter 7 bankruptcy.

Some people are surprised that pensions for government work such as teachers, police officers, military, or firemen still count as income. Workers’ compensation benefits also count as income. Short-term or long-term disability from a private company that is not social security are considered income. Regular wages or income from self-employment are considered income. Child support and alimony are considered income on the means test. Even if the income is not taxable, it could still qualify as income on the means test.

The issue of whether money in your account at the time of filing is exempt is a totally different issue than whether it counts as income on the means test. For example, workers compensation, child support and alimony are generally exempt even though they are considered as income on the means test Any money you have in your bank account from one of these sources in addition to social security or veteran disability benefits would be protected from the trustee.

We can exempt up to 75% of wages in your bank account. However, self-employment income is not exempt. It is important to have an attorney help you evaluate your candidacy for a Chapter 7 bankruptcy and to ensure you maximize your property exemptions.

When I file for bankruptcy is my home protected?

When I file for bankruptcy is my home protected?

If you have been living in Florida for over 2 years, the homestead exemption can be used as long as there is less than $189,050 in equity for each person filing. For example, if there are two married people filing a joint bankruptcy, then you can double the exemption amounts so that amount would be less than $371,100 in equity you would be allowed to protect. You can have unlimited equity in your home if you have owned it for 1215 days prior to filing your petition.

This includes another home if you have bought and sold another homestead property within those 1215 days. Typically, this is not an issue since the home equity is usually lower than the allowed statutory amount. If you have moved from another state in the last 2 years, we cannot use the Florida exemptions and would have to perform an analysis on which exemptions apply. Some states allow non-residents to use their exemptions. Other states will require non-residents to use federal exemptions. Most states would not allow you to exempt property in Florida after you have moved from another state.

You must also be residing in your home to be able to claim homestead exemption. The homestead exemption would not protect or apply to an investment property or a property where you are on the deed but are not living in the residence. There are exceptions if you are away from your home temporarily but have full intention of returning. Some examples are being away for medical treatment or being active duty in the military. As long as you intend to return to your home and you are not renting out the property, it can continue to be exempt as your homestead.

Should I do a cash out refinance to pay off my debts instead of filing for bankruptcy?

Should I do a cash out refinance to pay off my debts instead of filing for bankruptcy?

With inflation hitting record highs, people are looking to cash out the equity in their homes, sell their vehicles, and liquidate their retirement accounts to pay off their debts. This can be problematic for a few reasons.

First, if home values go down then you are stuck with a debt that exceeds the value of your home. If you run into a situation where you now have a higher payment that you cannot afford due to a loss of job, divorce, or medical issues the lender would foreclose on the property and potentially make you responsible for the deficiency. Property values fluctuate up and down.

Second, it’s not advisable to pay off unsecured debts with secured property. If you can eliminate 100% of your unsecured debt in a bankruptcy, while still having the ability to keep your home, that is going to be a better option than increasing or extending your mortgage payment for years and risking a future default on the mortgage loan.

Similarly, it’s always best to preserve your exempt assets such a 401k, rather than liquidate them to pay debts. The bankruptcy would allow you to eliminate your unsecured debt while still preserving the money in your 401K for your retirement without an adverse tax consequence. Furthermore, there are also costs associated with the refinance such a mortgage origination fees, appraisals, recording fees associated that can be up to 3-5% of the loan which you are paying for years. This cost typically far exceeds the cost of filing for bankruptcy.

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