Sh*t Happens... That's Why There's Bankruptcy
LegalConsumer.com's Guide to 2022 Post-Pandemic Bankruptcy Planning

Sh*t Happens... That's Why There's Bankruptcy

Most Americans are just one catastrophic event away from financial ruin. Sometimes a life event (i.e. "shit) happens to us.... And it can overwhelm us with debt. But, fortunately, that doesn't mean your life is ruined forever. In fact, that's exactly why bankruptcy law was created! — for the “honest but unfortunate debtor.”
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Updated: 2021-12-28
State Bankruptcy FAQ
 
How To File for for Chapter 7 or Chapter 13 Bankruptcy in My Zip Code:
Step-By-Step

Bankruptcy is designed to serve "the honest but unfortunate debtor" — to get them past their misfortune, and embark on a fresh start, by retaining enough property (exempt property) to give them a foundation on which to go forward on a sound financial footing.

or as the Supreme Court put it:

This Court has certainly acknowledged that a central purpose of the Code is to provide a procedure by which certain insolvent debtors can reorder their affairs, make peace with their creditors, and enjoy "a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preëxisting debt." Local Loan Co. v. Hunt, 292 U. S. 234, 244 (1934). But in the same breath that we have invoked this "fresh start" policy, we have been careful to explain that the Act 287*287 limits the opportunity for a completely unencumbered new beginning to the "honest but unfortunate debtor." Ibid.

The statutory provisions governing nondischargeability reflect a congressional decision to exclude from the general policy of discharge certain categories of debts—such as child support, alimony, and certain unpaid educational loans and taxes, as well as liabilities for fraud. Congress evidently concluded that the creditors' interest in recovering full payment of debts in these categories outweighed the debtors' interest in a complete fresh start. 

-Grogan v. Garner, 498 U.S. 279, 286, 287, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). See also Marrama v. Citizens Bank of Massachusetts, 549 US 365 (2007)

... or to put it another way

Bankruptcy is for when shit happens, financially speaking... It helps you get back on your feet by getting rid of debt you can't pay, without ruining your financial future for the rest of your life. 

Shit Happens....

Hundreds of thousands of Americans like you, since 2006, have used our free, online Means Test Calculator, because shit happens and people need fresh starts. 

It’s important to be able to make a fresh start after something unfortunate and unexpected. 

One unfortunate event should not ruin your whole life. 
Life is short. 
Fresh starts are important.

And financial stress can, and often does, create mental stress as well.

To the extent that bankruptcy can provide relief to both financial and mental stress, it is a worthwhile law that people should know about. 

Life on this planet is short, and precious, and not a rehearsal. One bad break in your life should subject you to a lifetime of financial misery and stress if it does not have to.

You you may have more legal options available than you thought. Bankruptcy is based on the principle of "asset protection" which is is an important financial discipline that applies to everyone, rich and poor.

Intelligent use of bankruptcy law can and should be an important part of your financial planning, preserving assets in ways that the law allows you to protect them. (You might be surprised how much property the law lets you keep, when you wipe out your debts in bankruptcy... So it pays to learn! )

Wealthy people who understand how money works use bankruptcy law strategically to preserve assets when things go south. There’s no reason that ordinary consumers like you can’t use these legal tools to do the same thing,  when “shit happens” to you.

Consulting with a bankruptcy lawyer early on in the process, sooner, rather than later — while you still have assets to protect, can be a very wise move.

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Kinds of Shit That Happens

The point of all the above quotes is that bankruptcy law exists because "Shit happens."

Life takes unexpected turns sometime...

Most Americans are just one catastrophic event away from financial ruin.

And it happens to all of us, often when we never see it coming.

Types of Catastrophic Life Events (aka. “Shit”)
  • loss of a job
  • illness, or medical event (combined with job loss, and medical bills)
  • divorce
  • accident

... but once shit has happened—then what?

Life goes on....

  • Utility Bills have to be paid.
  • Food and clothing - You and your kids need to be fed.
  • Cars need to be fueled and maintained
    • to get to work
    • to get kids to school
  • Housing needs to be paid monthly (rent or mortgage) 

Fortunately, that's exactly what Bankruptcy law is for!

Bankruptcy is about resilience — a chance to start over.

It's about giving you tools to get you back on your feet — on a solid financial footing. 

Guess What! You don't have to be "broke" to qualify for bankruptcy!

Asset protection laws ("exemptions"), at the state and federal level, let you retain a basic foundation of assets on which to plan your "fresh start" after your debts are officially discharged in bankruptcy.

You don't have to — and should NOT — wait until you are completely broke before you file for bankruptcy. 

Indeed  far to many people wait too long to consult with a bankruptcy lawyer and end  up depleting the very assets they could protect in a bankruptcy before  actually considering that option—  thereby squandering the very protection that bankruptcy law provides!

Do you qualify for bankruptcy?

You just need to show that:

  • you have a sizable amount of past debt (not future debt)
  • that you can't fully pay out of:
    • Your Monthly Income:
      • if your monthly income is below the median income in your state,
    • Your "Non-Exempt" Assets:
      • non-retirement, non-exempt savings and property (i.e. your assets),
    • Your "Disposable" Monthly Income
      • Note: if your monthly income is below the median income in your state, for a household your size, it is assumed you don't have to show how much, if any, of your income is "disposable", (after deducting standard "allowed" monthly expenses for a household your size, in your county.) 
        • housing (rent or mortgage)
        • food
        • transportation
        • healthcare

That's all that  the government requires.

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Property You Get to Keep

State and Federal asset protection laws (also called "exemptions") are important because they limit the power of a trustee or unsecured creditor to seize your property in a bankruptcy case.

These "exemptions" — so named because they define what kinds of property are "exempt" from "attachment" from a judgement-creditor's lien — exist because the government doesn't want you to be completely penniless!

Note different rules apply to "secured property" — that is, property you have pledged as collateral for a debt. 

State and federal exemption laws are designed to help most debtors keep most of their property when they file, so they have a solid foundation for a fresh start.

Most Cases Are "No Asset" CasesMost people (more than 90%) of consumers who file for Chapter 7 bankruptcy have their debts discharged while losing no property because all of their property is exempt or pledged as collateral to a secured creditor..

But, exemptions laws vary widely from state to state. And it's important to know which exemption laws you can use, and what the limits are, before you decide whether to file for bankruptcy.

This website lists exemption laws that are available to you in your state so you can see the kinds of property you can protect. We provide a detailed listing of New York exemptions, with specific citations, but it is up to you to determine whether you qualify for each exemption based on your unique set of facts.

Note this does not address the separate issue of "secured" debts — that is, where a creditor has a "lien" attached to your property — which bankruptcy can't do much about, except in some important cases of judgement liens, where the secured property is "oversecured" that is, where the total liens exceed the value of the property plus any exemptions. See more about that here.

See also these resources about bankruptcy in your state  

Income Limits for Chapter 7 Bankruptcy in your state

 

Spending Allowances for Food, Clothing, Housing, Transportation & Medical Care in your county
"Disposable Income" Calculations & The Means Test

The point of bankruptcy is to leave you with enough to get a fresh start. And you should have enough income to handle your monthly expenses, once your "shit happened" dischargeable past debts are eliminated.

Bankruptcy is NOT a way to cure chronic overspending. That is not what it's for.

But most people are not living beyond their means, but rather barely have the means to live, and large unexected debts can make that even harder.

The local and national standards in the "Bankruptcy Means Test" give you the right to enough income each month to:

  • keep the heat & water on,
  • keep a roof over your head,
  • feed your family and
  • get to and from work and child care

What is the means test?

When congress revised Federal bankruptcy laws in 2005, they added a new feature called the "means test", to determine whether people can qualify for Chapter 7 bankruptcy, or whether they must file a chapter 13.

The means test is designed to see if

  • you have any "disposable income" over the next five years to fund a Chapter 13 plan?
  • and if you do,
    • Would your disposable income over 5 years (60 months) pay at least as much or more to your creditors than they would get from a Chapter 7 (liquidation) bankruptcy, where the bankruptcy court trustee would sell all of your non-exempt assets (if any) and distribute the proceeds (after costs of sale) to your creditors?

"Disposable" Income Allowances for Where You Live 

  • How much can I spend on my rent or mortgage each month if I file bankruptcy in My State?
    • Means Test: Expenses: Line 8 & 9
  • How much can I spend on my healthcare  each month if I file bankruptcy in My State?
    • Means Test: Expenses: Lines 7, 25, 26
  • How much can I spend on my transportation  each month if I file bankruptcy in My State?
  • How much can I spend on my food, clothing and other necessities  each month if I file bankruptcy in My State?
    • Means Test: Expenses: Line 6
  • Does "disposable income" include deduct for retirement contributions each month?
    • Chapter 7 Bankruptcy doesn't affect your monthly contributions after you file. In Chapter 13, it depends .

Using the Means Test Calculator to see if you qualify for Chapter 7

Since LegalConsumer.com launched in 2006, we have featured a free online means test calculator, that will do the lookups and math for you, if you provide a zip code.

Bankruptcy Lawyer Directories For Your Zip Code

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Jurisdictional relevance: There are versions of this article for each State.
Select Your State:

You may also be interested in:

  • State Bankruptcy FAQ

    Your common questions about bankruptcy answered. Who is it for? How does it work? Do I qualify? Can I keep my car? My house?

  • How To File for for Chapter 7 or Chapter 13 Bankruptcy in My Zip Code:
    Step-By-Step

    Steps for filing bankruptcy in your state, from learning whether you qualify, to completing and filing bankruptcy forms, to discharging your debts and getting on with your life.

  • Means Test Calculator for Your County

    The Means Test Calculator is an automated version of the official three-part test form. Just choose your zip code, and the calculator applies the relevant state median income and county living standards, based on the number of persons in your household, your marital status and what county you live in.

Automatically apply your county expense standards and state income standards to your means test calculation.

Find where to file where you live

Automatically apply your county expense standards and state income standards to your means test calculation.

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