Good Faith, the Mortgage Payment, and the Chapter 7 Bankruptcy
The question, "Is my mortgage payment too high for Chapter 7 bankruptcy?" is really a question of something that the Bankruptcy Code calls "good faith" in the filing of a Chapter 7 petition---and the answer is very location-specific. A fellow bankruptcy lawyer recently joked that, if your mortgage payment is higher than the judge's in your bankruptcy case, it's too much. He was kidding---sort of---but the joke underscores the relative nature of the general question of whether any regular, monthly household expense is "too high" to be allowed in a Chapter 7 bankruptcy.
Why Is This Question Important?
The reason that anyone cares what your mortgage payment might be in a Chapter 7 because of the basic requirement under Section 707 of the US Bankruptcy Code that a Chapter 7 case (really, any bankruptcy case) have been filed in "good faith." This can mean a number of different things, and a lack of "good faith" can be a basis for the US Trustee, who is a functionary of the US Department of Justice with the job of policing "good faith" and other aspects of bankruptcy cases that are filed, to request the dismissal of your case. In this context, "good faith" is an indication of whether someone who has filed a Chapter 7 "liquidation" bankruptcy petition (in which nothing is required to be repaid to creditors) truly cannot afford to pay back some portion of what they owe in a Chapter 13 "reorganization" bankruptcy, which is essentially a payment plan requiring some percentage of that person's debt to be repaid. The way this sort of "good faith" is examined in the bankruptcy process is by way of the listing of all forms of income and all household expenses in the bankruptcy petition. This allows the Chapter 7 Trustee and the US Trustee (two different people) to examine your monthly budget and make a determination of whether, if you tightened your belt a little, you might be able to repay some of what you owe to your creditors. If they think that you could, the US Trustee will file a motion to dismiss your case, the usual reaction to which, if they are in the right (they are not always, and this can be litigated by an experienced bankruptcy attorney!), is to either allow the case to be dismissed or to go ahead and convert it to a Chapter 13 bankruptcy. There are a variety of household expenses, thus, that can conceivably be viewed as "too high" by the US Trustee. One of these could be that expense which is usually the highest in any household budget: the home mortgage.
What Is "Too High" a Mortgage Payment?
As noted above, it depends. That isn't helpful, naturally, so: the start of the analysis by the US Trustee is likely to be what the IRS Allowable Household Expense for housing for your area is. In Oakland County, Michigan, as of this writing, the current IRS Allowable Household Expense is $1,698.00 for a household of 1, including utilities. So, if you are a single-person living alone any paying significantly higher than $1,248.00 each month for your mortgage, it is a possibility that that household expense will be analyzed by the US Trustee as an issue of good faith. However, generally, anything in the neighboring vicinity of the local expense standard is not going to draw much attention or scrutiny in a Chapter 7 bankruptcy. This is not a bright-line analysis: if you are a single person reading this and have a mortgage payment each month above that figure (including utilities), don't assume that you will encounter difficulty with a Chapter 7 filing! The question that some case-law on this subject has hinged on is: Can the debtor filing the bankruptcy reduce expenses significantly without being deprived of necessities such as food, clothing, and shelter? Yes, a home is shelter, and shelter is a necessity---but the US Trustee will, in considering filing a motion to dismiss, look also at what the average price of comparable rental housing might be in your market. Can you surrender the house in the bankruptcy and rent a similar home for less money, in other words?
Is My Mortgage Payment Too High for Chapter 7? The Bottom-Line
The question will ultimately focus on whether your particular home with your particular mortgage payment is far enough in excess of the standard to constitute a "luxury." Most home mortgages are not going to touch this level. If you live on a private island in a gold-plated mansion and file a Chapter 7 bankruptcy, you can expect a variety of issues to come down the pipeline at you; this is just one of them. All such questions turn on the facts of an individual case, and there is certainly, in any such accusation by a US Trustee, room for argument except in extreme cases of high-wealth individuals whose debts are not business-related debt. The possibility of such objections, however, is a primary reason to retain a qualified and experienced bankruptcy attorney to assist you with your case. When you shop for a bankruptcy attorney, shop for service and shop for expertise. Your assets, your case, and your discharge could be at stake. If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.
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