In 2005, the U.S. Bankruptcy laws changed because more people were filing Chapter 7 bankruptcy petition instead of Chapter 13. Chapter 7 wipes away unsecured debts such as credit cards and personal loans. Prior to the change in the bankruptcy law, you could file for Chapter 7 even though you had enough money to pay creditors the money you owed them.
Now, you can’t choose which bankruptcy chapter you want to file. Instead, you must complete a Means Test. The bankruptcy Means Test is a formula to determine if you have enough money left over to file for Chapter 13.
You see, Chapter 13, or wage earner’s bankruptcy, requires you to pay your creditors back over a three-to-five-year period. Each month, you sent the bankruptcy trustee a payment. You also may all your current monthly bills. The former requires disposable income. Disposable income is the amount of money left after all of your monthly bills are paid.
Calculating the Means Test
The process of the Means Test is complicated. It’s important to have a qualified bankruptcy attorney walk you through the bankruptcy process and help calculate the formula to determine if you qualify for Chapter 7 or Chapter 13. The information here is an explanation to help you understand the process.
To determine whether you have enough disposable income to file for Chapter 13, you start by adding up all your income. Next, you add all your monthly bills. The third step is to find your state median income for your household.
Deduct your monthly income from your monthly expenses. This may leave a positive or negative balance. If you have no money after your bills are paid, you fail the Means Test. It doesn’t mean that you can’t file bankruptcy. You can’t file for the wage earner bankruptcy.
If you have a positive balance, go to the next step. This requires you to subtract your disposable income from the state median income for your household. The total amount after the deduction may leave you with a positive or negative balance. If have a negative balance, which means no disposable income, you may not qualify for Chapter 13.
The reason why you “may” not qualify is simple. It’s hard to know what is considered income for bankruptcy purposes. That’s why it’s best for a lawyer to calculate your Means Test. It may seem like you don’t have enough money to file for wage earner bankruptcy, but you do. The opposite is true too. You may have enough disposable income when you complete the Means Test, but actually qualify for Chapter 7.
Discharge Your Debts in Chapter 7 or Chapter 13
The Means Test is a complicated formula. The purpose of the process is to qualify you for Chapter 7 or Chapter 13. Depending on your financial situation and which bankruptcy you want, you may want to fail or pass the test. For example, to discharge debts in Chapter 7 means that you aren’t required to pay creditors. They take a loss. You get financial freedom. Thus, you want to fail the test.
However, if you want to pass the test, Chapter 13 will discharge debts after you finish your payment plan. For more information, contact a lawyer. A bankruptcy lawyer will guide you through the process and explain more about the changes to the laws that affect your eligibility. For instance, your bankruptcy attorney will explain that you need to complete credit counseling before filing for your either chapter. Your attorney can’t complete the counseling with you. You must contact an approved credit counseling agency to discuss your debts and whether you have an alternative to pay such as a budget. Contact a bankruptcy attorney today to learn more about the test and other laws.