If your debt profile has grown over your head and out of your control, Chapter 7 Bankruptcy may be the right option for you. Chapter 7 Bankruptcy is designed to allow the debtor to get a fresh start, that is to start over without any outstanding debt. Chapter 7 permits the debtor to keep a certain amount of equity in their assets. For most people, the entire amount of equity is exempt from the reach of the bankruptcy trustee, which means that most people can keep everything they own – house, cars, personal property – and still eliminate all debt. Of course, there are exceptions; for example, student loans cannot be discharged in bankruptcy, nor can past due amounts on a mortgage or car loan in most instances. If you have debt that can’t be discharged, you may want to consider a different type of bankruptcy, Chapter 13, which allows you to pay back arrears on mortgage, car and even back taxes over 3-5 years.
However, not everyone is qualified to file Chapter 7 Bankruptcy. Bankruptcy debtors with primarily consumer debt must pass a “means test” to determine their qualification for Chapter 7 bankruptcy. The “means test” is income-based and is designed to prevent people with a certain amount of excess income after expenses from completely discharging the debt. But this does not mean that you must be penniless in order to satisfy the means test. What does qualification for the Chapter 7 Means Test involve?
Passing the Means Test
First, if a person has primarily business debt, like small business owners, the means test is not used. The means test only applies to people with mostly consumer debt like credit cards, loans, etc. Second, if your average monthly income for the six months prior to the bankruptcy filing is less than the median income of a household of similar size in your state you automatically qualify to file for Chapter 7. Third, if your average income is more than the median, you can still qualify for a Chapter 7 if your income is within or below the amounts allowed for expenses such as mortgage or rent, car payment, household expenses, etc. Basically, it’s a balancing test.
State median income levels vary – and this will be a huge determining factor of your qualification. Where the median income comparison is not used, unsecured debts and calculation of a debtor’s disposable income are considered. To pass the test, you must determine whether your disposable income is enough to care for a part of your unsecured debts. If the “leftover” or disposable income exceeds a specific amount, you may fail to qualify for filing Chapter 7 bankruptcy. This determination is complicated and should be determined by your attorney. You should never assume you can’t qualify for a Chapter 7 even if you make a substantial income.
For instance, if your estimated disposable income, that is income over allowed expenses over a five-year period is less than $6,000 (at $100 monthly), you will likely qualify for Chapter 7. If you have more than $100.00 of monthly disposable income, you will likely have to file a Chapter 13 instead, where you pay some but less than all your debt back over three to five years. The point of the means test is to assure that a person who has the income to repay a significant portion of their debt should do so.
You must receive credit counseling to file for any type of bankruptcy. This counseling must be received from a government-approved counseling agency. The counseling is mandatory and must be done within 180 days prior to the bankruptcy filing. A second financial management course must also be completed before a discharge can be obtained. Your attorney will be able to give you a list of credit counseling agencies. The course can usually be taken online or over the phone.
If you are considering filing for Chapter 7 bankruptcy and are wondering whether you are eligible, you should contact an attorney. At the Law Office of Sharon S. Masters, we will complete the means test with you as part of the free initial consultation. You can also obtain the forms from the U.S. Bankruptcy Court’s website, but they are not user-friendly.
If you still have questions about Chapter 7 Bankruptcy, and how it may benefit you, your family, or your financial situation and live in the Philadelphia, PA vicinity, please call the Law Office of Sharon S Masters for a free, no-obligation consultation. Attorney Sharon Masters will speak with you personally and can be reached at (610) 322-5277 or at [email protected]