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The presence of children in a household can make an enormous difference with regard to Chapter 7 bankruptcy eligibility—and to Chapter 13 affordability
The presence of children in a household can make an enormous difference with regard to Chapter 7 bankruptcy eligibility—and to Chapter 13 affordability.
This is true in a both a “pro” and “con” sense.
First, every parent knows very well the enormous household expense that a single child represents. From food and clothing to schedule, tuition, daycare and child care, and athletic, extracurricular activity and recreation expenses, parenthood is, in the financial sense, an incredible drag on one’s finances.
Obviously, children have their benefits, too, but these life-affirming up-sides are outside the scope of this bankruptcy-related article. We’ll stick to the financial impact here!
Children are expenses, in other words. Big ones. Is that a good thing or bad thing when it comes to the prospect of filing for Chapter 7 or Chapter 13 bankruptcy?
Generally speaking, allowable household expenses are beneficial to the affordability of your bankruptcy process. When these expenses imposed by the presence of actual human beings who, merely through existence, extract money from your monthly average take-home pay rather than provide it, this is also beneficial to your Chapter 7 bankruptcy eligibility and your Chapter 13 bankruptcy affordability (with notable caveats, explained below).
This Article will discuss why this is the case and will also, along the way, tell you a little bit about how bankruptcy in Southeast Michigan actually works.
Children in Bankruptcy: The Money-Sponges Give Back
To explain the bankruptcy “benefit” of shouldering the expenses that come along with parenthood, we must first discuss bankruptcy eligibility generally and define what is and is not an “allowable household expense.”
When you file for bankruptcy, you must disclose an enormous amount of personal information that you would probably otherwise not prefer everyone in the world be able to view. This includes your debt liability, obviously, but also your assets, their value, financial transactions you’ve engaged in over the past 6 years, business and legal and real estate interests—and income and expenses.
Naturally, none of this means that your nosey neighbor is going to suddenly know your business. If you don’t tell her that you’ve filed for bankruptcy (and why would you?), she’s not going to know to look in the first place. Even if she does know, your neighbor is highly unlikely going to know where or how to look, unless your lawyer is a bankruptcy lawyer or works for a financial institution.
So fear not.
Nevertheless, you are going to have to disclose your household average monthly income from all sources, as well as your household monthly average expenses.
Why is this?
There are a few reasons why the US Bankruptcy Court needs to know how much money you make and how much you spend each month when you enter into a Chapter 7 or Chapter 13 bankruptcy proceeding.
Children and Chapter 7 Bankruptcy Eligibility
In order to file a Chapter 7 bankruptcy in Michigan, you must, on a household level, earn an annual income that is below Michigan’s current median income for households of your size.
Further, your net (take-home) home monthly income cannot be artificially low—in the eyes of the US Trustee’s Office that monitors such aspects of US bankruptcy proceedings—because you have factored in non-allowable expenses, or luxury-level expenses of various sorts.
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Children in the Chapter 7 Means Test
The first eligibility requirement, above, is describing the function of the so-called Chapter 7 Means Test.
The Chapter 7 Means Test requires that your bankruptcy attorney inputs all gross (pre-tax, pre-deduction, pre-business expense, etc.) income earned by everyone in your household for each of the 6 months prior to the month in which your bankruptcy case is to be filed.
“Household income” thus includes a spouse, obviously, even if that spouse is not filing your Chapter 7 case jointly with you. It also includes any other wage-earners living under your roof.
The Means Test averages that income, next, and then multiplies that average by 12 (months) to compute your annual household average income.
It then compares that to the median income for a household of your size in your part of Michigan.
If you are under that average, you are eligible for Chapter 7 bankruptcy.
If you over that average, a variety of deductions can then be made to reduce your gross income. We’ll talk about some of these, below, but, after applying all available deductions, if your bankruptcy lawyer has reduced your remaining income to an amount under that household median, you are, again, eligible for Chapter 7.
If not, you must file a Chapter 13 bankruptcy. More on Chapter 13 below.
For Chapter 7 Means Test purposes, there were 2 important features noted above at which the presence of minor children has an advantageous effect:
- Household size
- Allowable income deductions
With regard to household size, nothing can be more true for any parent than the realization that children add to the number bodies in a house without contributing much of anything, other than stray socks and school art project detritus.
Minor children certainly don’t tend to contribute income to a household.
However, they do increase the household size. This is positive for Means Test calculation and for Chapter 7 eligibility chances.
As of this writing, a household in the Detroit area with 2 members has a median Means Test income of $67,015. Add in a single, 1-year-old child to become a 3-member household with no additional income, and the median increases to $80,465.
That baby just saved you a monthly Chapter 13 plan payment and 4.5 or so years spent in a lengthier bankruptcy proceeding!
With regard to income deductions, as noted, children represent a host of expenses. From an increased housing, utility, and food deduction to child care expenses that can be deducted from your gross Means Test income dollar-for-dollar, your available Means Test income deductions are far more favorable with children in your household than without.
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Child-Related Expenses and Chapter 7 Bad Faith/Good Faith Expense Questions
The Means Test is not the end of the Chapter 7 eligibility analysis, contrary to popular belief.
The Means Test as a requirement for Chapter 7 eligibility was jammed into the US Bankruptcy Code in 2005 by a bipartisan cabal of US Senators and Congresspeople working at the behest of financial industry lobbyists. However, the Bankruptcy Code in present form already existed prior to 2005.
It already contained a mechanism for filtering out “bad faith” bankruptcy filings.
This “bad faith” scrutiny mechanisms emerges from the portions of the Bankruptcy Petition Schedules that must be filed that disclose your average monthly income and average monthly necessary household expenses.
The word “necessary” is used in relation to these expenses because people filing for bankruptcy are expected to tighten the belt a little, if they had not already (most certainly have).
If you are making a $2,000 car payment on a Lamborghini, for example, this would be considered a luxury-level automobile payment—and very, very unnecessary.
The US Trustees and the Chapter 7 Trustee (and Chapter 13 Trustee) assigned to your case will scrutinize your expenses and object to your discharge if they believe that your Expense Schedule contains unnecessary expenses, luxury-level expenses, or other “indicia” of bad faith.
Per the Congressional Record, relief from debt through the bankruptcy process is available only to “good faith debtors.”
Most people are good faith debtors. However, some expenses that will not feel very “luxurious” to you have been ruled by Bankruptcy Courts to be “unnecessary.”
Your bankruptcy lawyer will advise you as to whether you have any of these sorts of expenses. One example, however, that often follows the presence of children is private school tuition. It is well-settled in case-law here in the Eastern District of Michigan and in most Federal jurisdictions around the US that private school tuition is not an allowable expense, with rare exceptions only.
Otherwise, what do children have to do with any of this?
Again, with more children come more mouths to feed. With this need comes a higher monthly average grocery bill. With this need comes the need for larger housing that costs more to rent or own and to heat keep well-lighted and supplied with potable drinking water.
And so on.
Children in your budget means that there is, when your average monthly necessary expenses are deducted from your take-home, less money left over. Or none. Or even a negative amount.
This means little to no “bad faith” allegation from the US Trustee.
Children in Michigan Chapter 13 Bankruptcy Proceedings
The Means Test applies in Chapter 13 bankruptcy proceedings as well as in Chapter 7, but for a different purpose. Likewise, bad faith scrutiny of expenses occurs in Chapter 13 as well—perhaps more so.
It is first worth briefly describing the Chapter 13 process.
A Chapter 13 bankruptcy in Michigan is not a “discharge all the debt, pay nothing back” process as is Chapter 7.
In a Chapter 13, instead, you make a monthly payment every month for 3-5 years to the Chapter 13 Trustee assigned to your case by the Bankruptcy Court. Largely, you do not pay anything directly to your creditors while doing this (certainly not your unsecured creditors).
The Chapter 13 Trustee takes that payment and portions it out to herself (they take a percentage-based fee), then to your bankruptcy attorney for his or her fees, and, then, whatever is left over is disbursed to your creditors.
Unsecured creditors such as credit card debt holders or medical debt holders get only what is left over at the end of the process after everyone else has been paid first, and any amount you still owe them “on paper” is discharged fully at the end of the process (with exceptions such as child support obligations and, in most cases in Michigan bankruptcy, student loan debt).
Your income and expense schedules determine your monthly payment amount.
Thus, if after all allowable necessary household expenses (as affected by the presence of children as described above) are deducted from your take-home pay, you have $200 remaining—that is your monthly Chapter 13 plan payment amount. If more is left over, your payment is higher, accordingly.
For this reason, expenses are even more highly scrutinized in Chapter 13 than in Chapter 7. Chapter 13 Trustees in Detroit love to object to debtors’ expenses as being “unreasonable,” even when there is no real indication of bad faith. Certain child-related expenses such as daycare are specifically provided for in the Bankruptcy Code—yet Detroit Chapter 13 Trustees seem to believe it’s either unnecessary, generally, or that it can be had for $50 per month.
In any case, that’s why you hire an experienced bankruptcy attorney to represent you. It remains beneficial from an expense standpoint to have children rather than not.
Even if your kids have come to resemble a school of never-satisfied piranha to you, every dollar you spend on groceries for them is a dollar you don’t have to pay to the Chapter 13 Trustee for distribution to your creditors.
The Chapter 13 Means Test does not answer any eligibility question, but it does determine whether you are eligible to file a 3-year Chapter 13 payment plan or whether you must file a 5-year Chapter 13 plan. It also determines whether or not there is any minimum amount that your unsecured creditors must receive from your Chapter 13 plan in order for the plan to be approved.
Thus, children are beneficial with regard to the Means Test in Chapter 13 also—for the same reasons noted above.
When are children less than helpful in Chapter 13?
When unexpected expenses or emergencies arise around them, as they tend to do. Broken arms, daycare cost increases, rapid-fire body growth and suddenly too-small clothing, the need for special educational expenses … It never stops, does it?
Chapter 13, as you have seen described above, is a process constructed from the mathematical averages of your income and expenses. Your Chapter 13 plan payment is the result of your “normal” expenses being deducted from your “usual” monthly income.
When, suddenly, one month, one of these becomes a number that is other than the usual number, making your Chapter 13 plan payment can become a hardship. You may be faced with a choice of making that payment or buying groceries in the proper amount for those little piranha around the table.
This is, again, where having an experienced Michigan bankruptcy lawyer on your side will make your Chapter 13 process a success.
A good bankruptcy lawyer will motion the court for Plan payment suspensions, one-time tax refund retainer (in Detroit, you have to turn them over every year to the Chapter 13 Trustee), permanent Chapter 13 Plan modifications, and other relief.
Children in Michigan Bankruptcy: The Bottom Line
The bottom line is that in bankruptcy, as in life, children are more of a blessing than curse. However, they do add a layer of expense-related and Means Test-related complication that is best reviewed and analyzed by an experienced Michigan bankruptcy attorney.
Attorney Walter Metzen is a Board Certified Bankruptcy Expert who has represented Metro Detroit parents in Chapter 7 and Chapter 13 bankruptcy proceedings for more than 30 years and has filed over 20,000 cases during that time.
If you are dealing with overwhelming debt and trying to decide which course of action is best for you and your children, contact us now to schedule a free conversation about your options.
