When debt becomes completely unmanageable people often consider the option of bankruptcy.
Chapter 7 bankruptcy, which wipes away much of an applicant’s debt, is the most extreme and often best solution for those who are facing serious financial problems. Unfortunately, the courts don’t allow just anyone to get a Chapter 7 bankruptcy discharge. An applicant would need to meet the criteria. To determine who may be able to partially repay what they owe with a plan that restructures debt, the U.S. Bankruptcy Court uses a formula called a “means test.”
The means test compares a debtor’s income for the previous six months to what he or she owes on debts. If a person has enough money coming in to gradually pay down debts, the bankruptcy judge is unlikely to allow a Chapter 7 discharge. The higher an applicant’s income relative to debt, the less likely a Chapter 7 discharge will be approved.
If you are not eligible for Chapter 7 bankruptcy, you may be eligible for Chapter 13 bankruptcy. Chapter 13 bankruptcy is the section of the bankruptcy code that allows debtors to keep certain assets but requires a portion of what is owed to be repaid in a time period of three-to-five years.
The means test has two steps. The first step considers if the filer’s income is below the Chapter 7 income limit, which is the median in the state where the petition is filed. If income is less than the median for the prior six months and there is no reason to assume it will soon increase, the test is passed, and the Chapter 7 filing can proceed.
The majority of applicants pass the test on step one. Those who don’t, move to step two.
Step two requires a petitioner to document how much of his or her money was spent on essentials like rent or a mortgage, food, clothes and medical bills. These are deemed allowable expenses since they are essential to living. What’s not on the allowable list is discretionary income which is money spent on non-essentials that could be diverted to debt payments.
If you’re among those who must complete step two, be advised that the courts carefully study your accounting, looking for errors. They will then compare your expenses to government data to determine whether what you’re spending is excessive. For example, if your rent payment is higher than the IRS standard rent payment in your region, you may not be able to deduct your entire rent payment on the means test.
If you pass part two of the means test and your disposable income is low enough, you can proceed with a Chapter 7 filing even if your income exceeds your state’s median.
Another thing to keep in mind is that you might not be eligible to file for personal bankruptcy if your debt is largely the result of a business problem. A business bankruptcy is necessary if most of your debt is related to a business, including a partnership, a limited liability company or a corporation. Some of a personal filer’s debt can be business related, but most of it must be consumer debt.
The good news for business filers is that you are exempt from the means test. That means that if a majority of your debt is business debt, you do not need to show that you are under median income and you do not need to establish that you do not have disposable income. This can be very helpful for higher earners with business debt.
Keep in mind that bankruptcy is usually reserved for those with extreme financial problems. Before proceeding with a filing, consider other options.
If you decide to pursue bankruptcy, contact an attorney who specializes in bankruptcies for more information.
In 2020, 590,170 nonbusiness Chapter 7 and Chapter 13 bankruptcies were filed, with Chapter 7 cases dominating. Far more people dealt with financial problems by avoiding bankruptcy and using a bankruptcy alternative.
If you are looking for an alternative to bankruptcy, consider hiring a debt settlement company. With debt settlement, a consumer pays less than what is owed. The payment is made via a lump sum after two or three years of saving for an amount large enough to make an offer. It requires a debt settlement company negotiating with one or more creditors to get them to agree to settle the debt for less than what is owed.
CuraDebt, a debt settlement company, is able to help you with all of your debt related needs. Contact us today to find out about how we can help you. 1-877-850-3328
Quiz Yourself:
- Do all Chapter 7 applicants need to pass both steps of the means test?
No. If income is less than the median for the prior six months and there is no reason to assume it will soon increase, the test is passed at step 1, and the Chapter 7 filing can proceed.
- Are all of an applicant’s expenses considered in step 2?
No. Step two requires a petitioner to document how much of his or her money was spent on essentials like rent or a mortgage, food, clothes and medical bills. These are deemed allowable expenses since they are essential to living. What’s not on the allowable list is discretionary income which is money spent on non-essentials that could be diverted to debt payments.