Question

[Karceno888]

What is a reasonable amount of debt for a person to file for chapter 7?

Thanks.

[shipo]

It varies; for some folks it could be a few tens of thousands, for others it could literally be hundreds of thousands.

Can you provide more details about your situation?

[Karceno888]

Well, I have about 20K in CC debt and about 20K in IRS debt from 2015-2017. I am not employed due to health issues for the last seven months, so I would qualify for the chapter 7. The only asset I have is a house with about 150k equity.

Thanks.

[justbroke]

I don't want to freak you out, but either under NY's exemption scheme or the Federal exemption scheme, I don't see all that $150K of equity being protected. In other words, you will likely need to come up with a good strategy to protect some or all of the equity. I have no suggestions because I've never had that much exposed in a bankruptcy.

Generally speaking, people file bankruptcy because they are insolvent. You appear to be the opposite -- not insolvent. You are, as we say, house rich and cash poor. As such I would be very careful with that IRS debt. The IRS loves to levy property. It's their favorite thing to force compliance.

Here's the underlying problem because you reside and are homesteaded in New York. If you have about $100K of that $150K exposed, a Chapter 7 Trustee would force a sale if you weren't going to self-liquidate. That means a voluntary Chapter 13. The problem in the voluntary Chapter 13 is the dreaded "best interest of creditors test." That test looks at what the unsecured creditors would have received in a Chapter 7 liquidation. Guess what... that would mean there would be $100K on the table. That further means that you'd be in a 100% Chapter 13. In other words, there's no way around paying all your unsecured creditors.

Of course, this is all based on no being able to protect a large chunk of that equity in the home. If you lived in Florida, this would be an easier decision, since Florida protects 100% of the homestead's value.

You're going to need a closer look by a local attorney. I'm sorry that I don't have any concrete answers but suffice it to say that your biggest issue is all that equity in a State that does not protect the homestead.

[Note: these answers are residency based. In other States, that have more generous homestead exemptions, the math is much different.]

[Karceno888]

I don't want to freak you out, but either under NY's exemption scheme or the Federal exemption scheme, I don't see all that $150K of equity being protected. In other words, you will likely need to come up with a good strategy to protect some or all of the equity. I have no suggestions because I've never had that much exposed in a bankruptcy.

Generally speaking, people file bankruptcy because they are insolvent. You appear to be the opposite -- not insolvent. You are, as we say, house rich and cash poor. As such I would be very careful with that IRS debt. The IRS loves to levy property. It's their favorite thing to force compliance.

Here's the underlying problem because you reside and are homesteaded in New York. If you have about $100K of that $150K exposed, a Chapter 7 Trustee would force a sale if you weren't going to self-liquidate. That means a voluntary Chapter 13. The problem in the voluntary Chapter 13 is the dreaded "best interest of creditors test." That test looks at what the unsecured creditors would have received in a Chapter 7 liquidation. Guess what... that would mean there would be $100K on the table. That further means that you'd be in a 100% Chapter 13. In other words, there's no way around paying all your unsecured creditors.

Of course, this is all based on no being able to protect a large chunk of that equity in the home. If you lived in Florida, this would be an easier decision, since Florida protects 100% of the homestead's value.

You're going to need a closer look by a local attorney. I'm sorry that I don't have any concrete answers but suffice it to say that your biggest issue is all that equity in a State that does not protect the homestead.

[Note: these answers are residency based. In other States, that have more generous homestead exemptions, the math is much different.]

Thank you for your reply.

Yes, that is why I was leaning on NOT filing.

I figure once I get back to work, I can just pull the equity out and pay them.

[justbroke]

It's still a good question and still worth figuring out all of your options.

[Karceno888]

It's still a good question and still worth figuring out all of your options.

NY State has to be one of the worst states to file in, I guess. Darn it.

I will look into it more.

What is the "best" state to file a 7 or a 13?

[justbroke]

What is the "best" state to file a 7 or a 13?

You will hate this answer, but it depends.

If you're trying to protect a large amount of equity in a home (more than $128K), then Florida, Texas, Iowa, and Kansas. This is because these 4 States have an unlimited homestead exemption. It's why so many wealthy people make Florida their State of domicile. You can have a $8,000,000 house in Florida owned outright, go through bankruptcy, and get to keep the house. (Likely not the furnishings, but certainly the house!)

If you're trying to protect equity in property other than a home, most other States are better than Florida. For example, Florida has a paltry $1,000 vehicle exemption. Similarly, Florida's "personal property" (think furniture, clothing, etc), is also only $1,000. Yeah... not easy to exempt much. (However, you get an additional $4K per debtor if you don't use the homestead exemption.)

Regardless, of these facts, I still think the four States mentioned are the best. You pay down your mortgage and put money into the house. They can never take the house. Just sell it after the bankruptcy and you're right back on your feet; at least in my extreme case of the $8,000,000 home.

[If you're thinking about moving to reap the benefits of the unlimited homestead exemption in these States, think again. There are venue and exemption rules in place to prevent "venue" shopping. There are also federal rules in place which don't allow a person to receive all of the unlimited homestead exemption until they have resided in that State for 2 years.]