30 Apr Middle Class Squeeze – A Case Study
Although the October, 2005 changes to the bankruptcy laws were big news to bankruptcy lawyers, most people did not really pay much attention to this new law. I therefore frequently get the question “I hear that the bankruptcy law changed – what is the significance of these changes?”
Obviously, someone asking this question does not want a three hour lecture, so I summarize the changes as follows: “the new law was designed to eliminate Chapter 7 as an option for middle class families. Unfortunately, these middle class families often cannot afford Chapter 13, meaning that the door to the bankruptcy court is often closed to families earning $60,000 to $100,000.”
Here is a classic case study. One of my clients emailed me to say that a close friend had been speaking with a lawyer over the course of several weeks and had planned to file Chapter 7. Now, out of the blue, the lawyer advised her that Chapter 7 was not an option and that she would have to file Chapter 13 and pay $460 per month for 5 years, which was impossible. Would I review the case as a second opinion?
A few minutes later, the friend, “Sally,” emailed me as follows:
I have been working with a different lawyer for a few months now, thinking I would be able to do a Chapter 7 bankruptcy. I am married and the one filing. I don’t know why we have to include my husband’s income in the equation, but I have been told that is the law. We basically make too much money when you combine his income to do a Chapter 7, but like you said in your email, we can’t afford the Chapter 13. My lawyer is telling me it’s $460 a month, for 5 years. There is absolutely no way that I can do this.
Our combined gross income is around $85,000. Basically, I have about $35,000 in credit card debt and $1500 in hospital bills. We have 2 children and 1 on the way in August.
Any advice you have would be greatly appreciated.
My response was as follows:
Sally, I think you identified the issue. Under the current law, the first step in the analysis is to compare your household income with the median income for a similarly sized family in Georgia.
In Georgia, the median income for a family of 4 is $66,508 (for 5 by the way it is $73,408). Arguably, you could exclude that part of your husband’s income that does not get used to benefit your household, but that is an uphill battle.
I have filed a few Ch. 7’s where the household income exceeds the median and in every case, the U.S. Trustee challenged my classification. Basically the U.S. Trustee wants every debtor with income over the median in a 13. They want you to downsize your home, reduce your expenses and live a spartan lifestyle.
If your household income is almost $20,000 more than the median, I think you would have a huge uphill battle to make a 7 work. You are the classic case of a middle class family being squeezed by this new bankruptcy law.
I think that potential bankruptcy filers need to look carefully at their State’s median income figures to see where they fall. If your income exceeds the median, you can expect your lawyer to tell you that you will have to spend a significant sum of money litigating the presumption of abuse with the U.S. Trustee, or that you must change your lifestyle if you want to file Chapter 13.
In other words, for middle class families, pain is now a very real element of bankruptcy.
Jonathan Ginsberg, Esq.
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