Thursday, November 27, 2008

Frequently Asked Questions: Bankruptcy Means Test and Starter Kit

Where Do I Start?

Whether bankruptcy is for you is addressed in prior blog posts. Where to start once you've decided that it is can be overwhelming. Start with this information.

The first step is to determine if you qualify for bankruptcy, and if so, in what type of bankruptcy case.

You don't qualify if you've filed for and received a bankruptcy discharge in a Chapter 7 case in the past eight years. If this is not a problem you can go to the next step, the Means Test, which is the gateway to the New Bankruptcy (The Bankruptcy Abuse Protection and Consumer Protection Act of 2005).

Other than certain automatic qualifiers many persons will have to take and pass the Means Test to qualify for Chapter 7 relief,or to determine their time commitment for a Chapter 13 plan or Chapter 11 plan requirements for individuals. See Bankruptcy Basics, below, for descriptions of Chapter 7, Chapter 11, and Chapter 13 bankruptcy cases.

You're In!

You automatic qualify for Chapter 7 relief, regardless of your income or expenses, if
a) you are a disabled veteran,
b) the majority (50%+) of your debt is business related, taxes, liability for personal injury, or
c) your gross income is no more than the median family income.

If you earn more than the median family income for your state or territory, you will have to take and pass the Means Test to qualify for Chapter 7 relief.

Ready For A Test?

Here are forms and databases you need to determine if you pass the Bankruptcy Means Test. has a free online Means Test application.

For the self-employed

If you don't pass the Means Test the first couple times, don't despair (unless you're way way off the mark).

Good lawyering might help you with the "six month income average" part of the test and with the deductible expenses. A lawyer can even argue that your higher than national average living expenses are reasonable under the circumstances (for example, your auto and driving expenses are way high because you need to drive far to get to work or for work). It can be tricky. (Cathy Moran, Esq blog.)

Prior to the advent of the "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005," the most common reason for someone to file under Chapter 13 was to avoid the loss of equity in their home or other property. And while equity protection will continue to be a big reason for people to choose Chapter 13 over Chapter 7, the new rules will force many people to file under Chapter 13 even if they have NO equity. That's because the means test will take into account the debtor's income level.

To apply the means test, the courts will look at the debtor's average income for the 6 months prior to filing and compare it to the median income for that state. For example, the median annual income for a single wage-earner in California is $47,363. If the income is below the median, then Chapter 7 remains open as an option. If the income exceeds the median, the remaining parts of the means test will be applied.

This is where it gets a little bit trickier. The next step in the calculation takes income less living expenses (excluding payments on the debts included in the bankruptcy), and multiplies that figure times 60. This represents the amount of income available over a 5-year period for repayment of the debt obligations.

If the income available for debt repayment over that 5-year period is $10,000 or more, then Chapter 13 will be required. In other words, anyone earning above the state median, and with at least $166.67 per month of available income, will automatically be denied Chapter 7. So for example, if the court determines that you have $200 per month income above living expenses, $200 times 60 is $12,000. Since $12,000 is above $10,000, you're stuck with Chapter 13.

What happens if you are above the median income but do NOT have at least $166.67 per month to pay toward your debts? Then the final part of the means test is applied. If the available income is less than $100 per month, then Chapter 7 again becomes an option. If the available income is between $100 and $166.66, then it is measured against the debt as a percentage, with 25% being the benchmark.

In other words, let's say your income is above the median, your debt is $50,000, and you only have $125 of available monthly income. We take $125 times 60 months (5 years), which equals $7,500 total. Since $7,500 is less than 25% of your $50,000 debt, Chapter 7 is still a possible option for you. If your debt was only $25,000, then your $7,500 of available income would exceed 25% of your debt and you would be required to file under Chapter 13.

To sum up, first figure out whether you are above or below the median income for your state - median income figures are available at the link above.

Be sure to account for your spouse's income if you are a two-income family. Next, deduct your average monthly living expenses from your monthly income and multiply by 60. If the result is above $10,000, you're stuck with Chapter 13. If the result is below $6,000, you may still be able to file Chapter 7. If the result is between $6,000 and $10,000, compare it to 25% of your debt. Above 25%, you're looking at Chapter 13 for sure.

Remember, if Chapter 7 isn't available to you, perhaps Chapter 13 is, and might even be more suitable. More on Chapter 13 especially its power to strip away mortgage liens later.

Finally, for higher asset/liability cases, corporate and partnership (non sole proprietory cases), Chapter 11 is available. [1] [2] [3]

Start Here

If bankruptcy is a legal solution for you, start with the certificate of credit counseling you will need to file your consumer bankruptcy case.

This provider of certificates is the lowest cost I have found so far, but dont take my word for it because they change all the time and I may be out of date.

Here's Your Bankruptcy Bonus Gift

When you file, bankruptcy relief is immediate and automatic - the Automatic Stay stops virtually all actions by creditors against you.

But don't wait t get bankruptcy relief until judgment is entered against you in an unlawful detainer! Game over!

Can You Really Do Your Own Bankruptcy Case?

Here's food for thought.

But you can try. Here's one do it yourself book by Nolo Press

Here's another popular Chapter 7 guidebook

And here is a Chapter 7 Case Flow Chart

If you are too poor to even pay the Chapter 7 $299 filing fee, you can apply for a fee waiver, or ask to pay it in (4) installments.

More valuable infomation: The American Bankruptcy Institute

(c) copyright 2008 - 2009 New Dawn Law all rights reserved

1 comment:

janefermartin said...

Thanks for the information..I really like your post..It covers almost every section of bankruptcy basics..I found it interesting and informative..
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