December 15, 2019

Don’t Assume You Can File Chapter 7 and “Start Over”

Over the past few days, I have received several calls and emails from potential clients who comprise a very different profile from my traditional client base.  These folks are solidly middle class to upper middle class families, often earning $100,000+ and living in $400,000 houses.   Here is an example of the type of correspondence I have been getting and my response thereto:

Jonathan:  I desperately need your advice.  I work in sales at XYZ company and last year I earned more than $200,000.  I am married with 2 kids.  This year I’m on track to earn about $120,000.  My house is worth $425,000, but the first and second mortgage combined equal to about $435,000.  I am also financing a Mercedes – the monthly payment is $725 per month and the payoff is $37,500.  I also have $35,000 in credit card debt.  I am not behind on anything and I have borrowed twice against my 401(k) to keep afloat.  My wife and I have made the decision that we are prepared to give up the house and the car and move into an apartment.  I would like to file Chapter 7 and walk away from everything – when can I schedule an appointment? –Fred

Here is my response: Dear Fred – unfortunately I don’t think you can file a Chapter 7.  Under the bankruptcy law, you cannot qualify to file a Chapter 7 unless your income falls below a certain threshhold called the “median income.”   As part of my analysis, I will compare your household income with the median household income for a family of 4 in Georgia (currently $68,908.00).  As your household income exceeds the median by over $50,000, a median income evaluation in your case would create something called a “presumption of abuse.”  This presumption is rebuttable in theory, but as a practical matter, I think is unlikely that you would be able to squeeze into a Chapter 7.

Instead, the “means test” of personal bankruptcy would dictate that you would have to file a Chapter 13 repayment plan.  Assuming that you did give up your house and your expensive vehicle, the bankruptcy trustee would expect you to downsize your lifestyle substantially in a Chapter 13 – at least to the point where you would have sufficient disposable income to pay back all of your creditors in full in a Chapter 13 case that will last 3 to 5 years.

Given that you are in sales, you also run the risk of committing to a Chapter 13 that provides for a payment based on current income.  Chapter 13 is not a flexible vehicle so you should not go into a Chapter 13 expecting that your plan payment would change if your commission income goes down.

So, for folks like Fred, the alternatives are – maintain your lifestyle and struggle to keep your head above water until you find a way to earn more money, or walk away from the expensive big ticket items, reduce your lifestyle, and commit every penny of disposable income to a 3 to 5 year payment plan.

About Jonathan

Jonathan Ginsberg represents honest, hardworking men and women in the Atlanta area who need personal bankruptcy protection. In practice for over 25 years, Jonathan teaches bankruptcy law and practice at legal continuing education seminars and he is a founding member of the Bankruptcy Law Network. Jonathan lives with his wife and children in Atlanta.


  1. my wife is a loan mod master. she managed to get our loan modified to a much lower rate so we can afford our payments, but we are behind on our taxes, and may have to consider our options, because this is not something we can just sit on.
    a re-negotiated loan amount based on current market analysis would be amazing, but i dont think it is realistic. if it’s a possibility, we will wait, if not, then foreclose or bankruptcy would be an option we would consider.

  2. My husband and I are are about 5 months behind on our mortgage and we have been struggling for two years trying to get caught up. We went into foreclosure last year around this time and with lots of phone calls and letters we finally were able to get a loan modification where we had to come up with $5,000.00 and they would put the rest of what we owed on the back of the loan. Now due some really bad circumstances we are behind again and can not possibly get caught up. We were trying to make a couple of other loan payments up until 3 months ago and then that got behind too. We do have one credit card that we have not used in over a year and we faithfully pay it every month, it is only 350.00 and we want to pay it off. My question is we live in Florida and we were looking into claiming chapter 7 but after consulting with an attourney he said that the courts will probably take our second vehicle because it is valued over $1,000.00 I guess we get an allowance of $1,000.00 and my 2001 Ford Windstar is valued at around 3,500.00 and that is the reason we told him we would not be able to file chapter 7 My husbands car is literally falling apart and he is on the road doing his sales job so I would need a second vehicle. Anyway I was just wondering if we claimed chapter 13 could we walk away from our house? Is that allowed? I mean walk away and not owe anything. After alot of searching in our hearts we do not think there is any way to be able to make our house payment on top of the other payments that the Trustee will come up with. Our anual income is only 35,000.00 and our house payment is almost $1700.00 a month due to the loan modification and a refinancing we did three years ago when our value in our home was quite high and now our property value is lower than we owe on this house…It dropped around $50,000.00 There is no way we can make our payments…What can we do? Thank you

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