Long Island & NYC
Chapter 7 Bankruptcy Lawyer

During the Chapter 7 case the client will need to attend a creditors’ meeting where the client is interviewed by a Chapter 7 trustee whose role is to determine whether there are potential assets with equity that may be sold to satisfy the claims of creditors. Most Chapter 7 cases are considered to be “no asset” cases in that there are no assets available to satisfy the claims of creditors. The reality is that most Chapter 7 debtors do have assets, but their cases nonetheless are considered to be “no asset” cases because their assets are not considered to have significant equity. What diminishes from the potential “equity” in particular assets are liens, such as mortgages and car loans, and statutory exemptions which protect a certain amount of equity — amounts in value in particular assets that, under the law, are unavailable to creditors (summarized in the table above).

Most clients keep all of their property including their vehicles, homes and personal possessions as long as they stay current with the payments on these items and do not have too much equity in such property. If a married couple is filing for bankruptcy together, in many instances they could double the exemption protections. However, even in cases where there is some unprotected equity in an asset that is not covered by liens and/or exemptions, we can negotiate with the Chapter 7 trustee on behalf of the debtor to make a settlement payment to the trustee in order to keep the non-exempt portion of the asset and prevent the asset from being sold by the Chapter 7 trustee. The amounts the Chapter 7 trustee can collect in the case, either through sales or settlements, are used to make pro rata payments to creditors and to pay the administrative claims of the trustee for commission and the trustee’s attorneys for legal fees.

In addition to the issues of assets and transfers, there is the issue of income level, in that persons qualifying for Chapter 7 relief cannot have income above a certain level based on their household size. This test for income is called “Means Testing” and is applied if the client’s debt is primarily consumer debt (incurred for family, personal or household purposes) rather than primarily business debt. The client needs to have an average of six (6) months gross income that is below a certain median level in New York State, or alternatively pass a means test which takes into account the client’s necessary expenses in determining if the client qualifies for Chapter 7 relief (despite their income being above the median level). Even if a client is over the median income they may still have “wiggle room” to pass the median income test if their expenses are for basic necessities: housing (mortgage or rent), utilities, food and/or clothing, which would effectively lower the client’s counted income.

The income issue needs to be carefully analyzed prior to filing a Chapter 7 case by comparing the client’s household income, relative to their family size, and their necessary allowed expenses, in determining whether the client should be able to file for Chapter 7 relief. Because the average household income on Long Island is higher than in many other parts of New York State, it is important to carefully average the client’s gross household income for the 6 months prior to the filing of the bankruptcy petition. In many cases that are close to the line, this can be a tricky assessment, since even if the household income exceeds the median income level, there are many allowances for various essential spending that could potentially allow a “close” case under the proper circumstances to file despite income that is over the median. Where the gross household income does not pass the means test, the client can still proceed to obtain relief under Chapter 13, which does not have the same filing limits as Chapter 7.

However, even if a “border-line means test” client successfully but barely squeezes through the “means test,” they also need to pass the “budget test” which looks at the client’s present net income (after taxes) and regular expenses to determine if the budget, not including obligations dischargeable in the Chapter 7 case, is negative, which allows a potential Chapter 7 filing, or if it is positive and shows a surplus of disposable income, which would disqualify the client for Chapter 7 eligibility.