December 7, 2010
The Means Test For Chapter 7
The two most popular chapters for filing for bankruptcy in the US are chapters 7 and 13. Of the two, chapter 7 is probably the most popular, as it allows a completely fresh start financially, coming out of the proceedings with no debt, as opposed to chapter 13, which makes an individual repay their debts over time, by means of a repayment schedule, the terms of which can be harsh.
Even though all the individuals possessions are sold under chapter 7, the end result of freedom from debt makes chapter 7 the most popular for the debtor, but perhaps the least popular for the creditor.
This is because that although the debtor loses virtually everything, the creditor often recovers very little.
Often this is just a sad reality of life, but until a few years ago chapter 7 could be used by the unscrupulous simply to get rid of debt that they could in fact afford to repay, albeit with a little rearranging of their debts.
To ensure that creditors generally get paid the maximum amount possible, chapter 7 bankruptcy now comes with a compulsory “means test”. This means test is applicable to those who file who have mainly consumer debt. Businesses do not take the means test.
The means test has a number of stages, the first being a calculation of the debtor’s disposable income, based on their earnings over the previous 6 months and deducting various living expenses.
The means test works by taking the applicants average earnings over the past 6 months before filing, and deducting certain monthly expenses to arrive at the net “disposable income”.
The first stage of the test is to see if the applicant’s disposable income for the previous 6 months is less than the median income for a same sized household in the same state. If it is you can go straight into chapter 7. If not, the applicant is to some extent at the mercy of the court, who decide whether the amount of the applicant’s disposable income is sufficient to make some repayment of their unsecured debt. The applicant can often find that the court considers that they can, but in reality it leaves the applicant with very little money to live on, making life tough financially.
This means that the applicant who fails the means test is forced into a chapter 13 repayment plan over 3-5 years.
The calculations are complex and vary from state to state. It is worth the expense of hiring a legal professional to help guide one through the legal process and get the best possible outcome.
Bankruptcy is a torrid step, despite what other people may advise you. It can devastate your financial postion as your credit rating drops. Although chapter 7 is the most popular form of bankruptcy, it may be worth looking at chapter 13 bankruptcy law. If you would like further free information and advice, visit www.chapter13bankruptcylaw.net.
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