Bankruptcy? I’m too rich – and too poor

Luckily Officer Shaymus saw Farmley and quickly got out his squad car to try to talk him out of an irreversible decision.

“Why are you thinking of something so drastic?” he asked.

“My million dollar house had $1,200,000 in debt encumbering it,” he answered, “Now it’s only worth $750,000. The three rentals I bought in Maricopa produce $2,000 in rental income per month but are each $1,000 under water.  The banks want their money and want to foreclose.”

“You should consider bankruptcy, not bungee jumping without a bungee,” Officer Shaymus suggested.

“Oh, I consulted with Fill-ups and Associates, but their advice was far from encouraging, and they only specialize in bankruptcies for petroleum franchisees with liabilities arising from driving-while-impaired convictions,” he replied.

“What did they tell you?”  Shaymus inquired.

“Well, it’s just me and wife in our home and with the rental income and my recent lottery win, I can’t satisfy the means test.  I made more money in the last six months than the median income for an Arizona couple and I cannot file for Chapter 7 or a straight bankruptcy.

“I can’t file for Chapter 13, a wage-earner’s plan because I don’t have regular income and my credit card debt of $350,000 and secured debt of over $1,750,000 is too much.  So bankruptcy is not a real alternative for me.”

Officer Shaymus wrinkled his brow, and said,
“You’re in luck.  My brother-in-law Cramer Dun is a bankruptcy lawyer.  We were talking the other day about how the amendments that Congress passed in 2005 made it more difficult for people to qualify for relief under Chapter 7 or 13 if they have too much income and too much debt, if they’re too rich and too poor.  Then he reminded me of the joke about the man who complained to his minister of his poor financial condition.  The minister said, “Open the Bible to a random page and read what it said!”  Several months later his minister saw him on the street, whistling a happy tune, strolling along in a new suit.  ‘I’m curious,’ the minister said.  ‘Where in the Bible did you turn?’  ‘Chapter 11,’ he replied.  And that may be just the ticket for you.  So step off the edge and I’ll give you Cramer’s card!”

Choosing the best bankruptcy alternative demands a careful analysis of the candidate’s assets, liabilities, and income.  For most a Chapter 7 is the best, offering the quickest process and the least cost.  Many cannot qualify for Chapter 7 because they have too much income, an asset they want to keep, taxes they need to settle, or amounts due on their mortgage that they cannot pay within the time that their creditor would accept.  For them, especially if they have a regular income, Chapter 13 will buy time to pay the taxes, cure the home-loan arrearage, and save assets worth keeping like an heirloom from Grandma.

But Section 109 of the Bankruptcy Code limits who can qualify for Chapter 13 relief.  A potential debtor with more than $339,000 in unsecured debt, or more than $1,010,000 in secured debt secured by collateral like real estate or a car, cannot file a Chapter 13 petition.  For them, Chapter 11 may be the answer.

For many years, Chapter 11 was thought to be exclusively for big businesses like Chrysler or GM.  But recent changes to the Bankruptcy Code have made the standards for Chapter 11 relief for an individual more attainable.  Though individuals can file for Chapter 11 relief, it is more complicated and expensive than a Chapter 13.

It is not for the faint of heart or thin of wallet.  Achieving a confirmed Chapter 11 plan can cost up to $50,000 to 100,000 over the several months of preparing the disclosure statement and plan, and obtaining its confirmation. The minimum fee to start usually begins at $10,000.  But for some that is a small price to pay to avoid jumping off the Mill Avenue Bridge.

The laws governing whether someone can qualify for bankruptcy and if so, what type of bankruptcy is best are complex.  All of the relevant facts and factors must be taken into account.  Good legal advice and common sense are essential.  But with the right choice and the right advice, the fresh start promised by the law and guaranteed by the United States Constitution can become a reality.

Written by Attorney David B. Goldstein, dbg@hgplaw.com