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Chapter 13

Decent Income, but Drowning in Credit Card Debt

December 5, 2018

Grey and Brown Line Attorney & Law LogoAre you drowning in credit card debt, even though you have decent income coming in? These days, it’s getting harder and harder to avoid this situation.  After taxes get taken out, and after you’re nickel and dimed from all the various companies competing to take your money, your paycheck just doesn’t go that far.  And perhaps you had an emergency where you needed to put a large expense on a credit card, or maybe you had a period of unemployment when you had to use your credit cards in order to survive.  And before you know it, you’re spending $2,000 a month just to make the minimum payments, making the situation worse.

It has crossed your mind to file a case with the Bankruptcy Court to get rid of all that debt, but you have heard that if you make too much money, you don’t qualify.  So what do you do?

It’s true that Chapter 7 cases, which erase all your unsecured debt in a fast, (usually) 3-month process, are “means tested.”  If you make too much money, you don’t qualify.  How much is “too much”?  It’s tough to say; the Means Test is a very complicated calculation.  However, as a rule of thumb, in California with a household size of one and no mortgage, a gross annual of income of around $80,000 starts to be a borderline case.  For a household size of three, $100,000 per year starts to be a borderline case.

If you don’t qualify for a Chapter 7 case, that’s not the worst thing in the world.  It’s better for you to have good income than bad.  And while Chapter 7 may not be an option, you still have Chapter 13.  Chapter 13 is a longer case.  Usually, they take 5 years.  You present the Court with a Plan, and that plan has to pay off certain creditors in full (for example taxes and mortgage arrears, but we’re not talking about those here).  Everybody else, your general unsecured creditors such as credit cards, get paid somewhere between 0% and 100% of what they’re owed.  Where you are on that scale is based on two things: your assets and (more likely) your income.

What if your income is high enough that you would have to pay your unsecured creditors 100% of what they’re owed?  Is there even any point in filing case?  Even there, I would suggest that filing a case would put you in a better position than the status quo.  The important thing to remember here, and this is critical, is that the 100% that is getting paid is the balance as of the time of filing.  At the moment you file a Chapter 13 case, penalties and interest freeze.

Here’s an example:  Let’s say you make $95,000 a year and are single.  You have $60,000 in credit card debt at 6% interest, and are paying $2,400 a month in minimum payments to service that debt.  At that rate, it would take you something like 14 years to pay off that debt.  But let’s say you file a Chapter 13 case.  That $60,000 freezes at the time of filing.  Because of your income, the Means Test says you can afford to pay $1,200 a month to your unsecured creditors, but to pay them off entirely over 60 months, you’d only have to pay them $1,000 a month.  (There will also be trustee fees and lawyer fees involved, but even so you’d be looking at a monthly payment of something like $1,150.)

So in Scenario A, where you don’t file a bankruptcy case, it would take you 14 years to get paid off, having paid a total of nearly $100,000.  In Scenario B, where you do file a bankruptcy case, it would take 5 years to get paid off, having paid a total of $69,000.  I think the benefit is clear.

If you have a decent income but are drowning in credit card debt, you should at least consider filing a bankruptcy case as one of your options.  If you live in the Bay Area, please give me a call so we can schedule a free initial consultation.