Chapter7 Bankruptcy  

What is the Chapter 7 Bankruptcy Means Test?
 
Beginning in October of 2005, people who want to file for Chapter 7 bankruptcy have to pass what is known as the "Chapter 7 means test". The Chapter 7 means test is a formula applied to determine whether or not the consumer should have enough money available to make some minimal payment to creditors in a Chapter 13 bankruptcy plan. The goal is to reserve Chapter 7 bankruptcy for those who really have no means to pay, and to push those who have available income into Chapter 13 bankruptcy plans, so that their creditors will receive at least partial payment.The means test can be a bit complicated, please contact me to determine if you qualify for Chapter7 bankruptcy.

The Means Test is a Two Step Process
 
Step One: Median Income Comparison

The first step in the Chapter 7 bankruptcy means test is simple: it compares your income to the median income in your state for a family the same size as yours. The median income for your family size may differ dramatically depending upon where you live whether you are above or below the applicable median income. If your income is higher than the median income, it doesn't necessarily mean that you can't file for Chapter 7 bankruptcy; it just triggers the second step in the test.
 
Step Two: Calculating Disposable Incomeand Unsecured Debts

The second step is a bit more complicated, and actually breaks down into separate pieces itself. Certain allowable expenses (determined by IRS guidelines) are subtracted from your income to find your "disposable income." If your projected disposable income over the next five years totals less than $6,000 ($100/month), you "pass" and can file under Chapter 7.If your disposable income is greater than $10,000 over the next five years, a presumption arises that you don't really need to file for Chapter 7 bankruptcy, and you will only be allowed to do so if you can demonstrate special circumstances. In the grey area between $6,000 and $10,000, yet another calculation is required. This one compares your disposable income over the next five years to a percentage of your unsecured debt to determine whether any significant repayment to your creditors is possible. If your disposable income over the five years is greater than 25% of your unsecured, non-priority debts, you find yourself in the same circumstances as if you'd had more than $10,000 in disposable income. If your disposable income over a five year period is less than 25% of your unsecured, non-priority debts, you "pass" the means test. 

What is the Chapter 7 Bankruptcy Means Test?

 In most instances, a Chapter 7 bankruptcy case is relatively quick; typically, a case will be completed and the debtor will receive a discharge within six months of the filing of the bankruptcy petition. However, there are a number of important dates that can affect the debtor's right to file a case and the relief available. The following timeline illustrates the relevant dates in the typical Chapter 7 bankruptcy case. If your creditors are making your life miserable and you want to stop those harassing creditor phone calls and collection letters then contact me to see if filing bankruptcy will be right for you.

The Means Test is a Two Step Process

Step One: Median Income Comparison

 The first step in the Chapter 7 bankruptcy means test is simple: it compares your income to the median income in your state for a family the same size as yours. The median income for your family size may differ dramatically depending upon where you live whether you are above or below the applicable median income.If your income is higher than the median income, it doesn't necessarily mean that you can't file forChapter 7 bankruptcy; it just triggers the second step in the test.

Step Two: Calculating Disposable Incomeand Unsecured Debts

The second step is a bit more complicated, and actually breaks down into separate pieces itself. Certain allowable expenses (determined by IRS guidelines) are subtracted from your income to find your "disposable income." If your projected disposable income over the next five years totals less than $6,000 ($100/month), you"pass" and can file under Chapter 7. If your disposable income is greater than $10,000 over the next five years, a presumption arises that you don't really need to file for Chapter 7 bankruptcy, and you will only be allowed to do so if you can demonstrate special circumstances. In the grey area between $6,000 and $10,000, yet another calculation is required. This one compares your disposable income over the next five years to a percentage of your unsecured debt to determine whether any significant repayment to your creditors is possible. If your disposable income over the five years is greater than 25% of your unsecured, non-priority debts, you find yourself in the same circumstances as if you'd had more than $10,000 in disposable income. If your disposable income over a five year period is less than 25% of your unsecured, non-prioritydebts, you "pass" the means test. 
             

General Concepts

What are the main purposes of bankruptcy?
Bankruptcy laws serve two main purposes. First, bankruptcy law may give creditors some payment on their debts. Second, bankruptcy law gives you a fresh start by canceling many of your debts through an order of thecourt called a discharge. 2. What are the different kinds of bankruptcy? There are four types of bankruptcy available to individuals:

     Chapter 7 (a liquidation-style case for individuals or businesses);
     Chapter 13 (a payment plan or rehabilitation-style case for individuals with a regular source of income);
     Chapter 12 (a payment plan or rehabilitation-style case for family farmers and fishermen); and
     Chapter 11 (a more complex rehabilitation-style case used primarily by business debtors, but sometimes by individuals with substantial debts and assets).

The two most important types of cases for consumers are chapter 7 and chapter 13. Both provide for some possible payments to creditors,a discharge for you and supervision by a trustee. Chapter 7 involves surrendering some of your property (at least in theory) in return for a discharge of many of your debts. The trustee sells any non-exempt property and pays your creditors. In chapter 13, you keep your property but must commit to a three- to five-year repayment plan. You then obtain a discharge of most of the debts not paid in the plan.
In both types of bankruptcy, most creditors must stop efforts to collect debts after you file your case. This protection is called the automatic stay. In a chapter 7, this relief is often temporary since you must still pay for your secured property (usually a home and/or car) or the creditor may ask the court to remove the automatic stay. 

3. What is the difference between chapter 7 and chapter 13?

Chapter7: A Brief Overview
Chapter 7 is designed as a liquidation of assets. Under this model, a trustee may sell certain property that you own at the time you file the bankruptcy case. The trustee uses the proceeds of the sale to pay creditors. However, the sale of assets in a typical chapter 7 case is unusual. In most cases, you will not have any assets over and above what the law allows you to keep. Thus, in most chapter 7 cases, you do not have any property that the trustee may sell.
About 90 days after you file chapter 7, most of your debts will be discharged, if yours is the typical case. This means you are no longer liable to pay the debt. Some debts are not discharged, however, and you still must pay them. Examples include past-due child support payments, some taxes and student loans. Debts for which you have pledged collateral for the loan (such as cars, homes and household goods) also do not go away in a bankruptcy.
The bankruptcy case addresses only the debts you list at the time of the bankruptcy case. You must pay debts you incur after the filing the bankruptcy case as usual. You may keep the money that you earn after filing a chapter 7 bankruptcy case, as well as most other property that you obtain after the filing.

Chapter13: A Brief Overview
Chapter 13 is very different. If you file under chapter13, you may keep your property and you agree to pay your debts over time from your current income, pursuant to a court-approved plan. The amount that you will repay to creditors under the plan will vary based on your particular circumstances.
The payments made to creditors under the plan must total at least as much as creditors would have received if you filed a case under chapter 7. The payments are made to a trustee, who distributes the payments to the creditors.
The plan lasts either until you pay your debts in full or until the end of a three- to five-year period. You receive a discharge at the completion of the plan.

This was just an overview. Contact me for more detail. 

4. Do I have to qualify for bankruptcy? How will I know if I am eligible?

Chapter7 Eligibility
After October 17, 2005, access to chapter 7 is more limited than it was in the past. If you are an individual with primarily consumer debts and you want to file a case under chapter 7, you will have your finances examined to determine if you can afford to pay creditors. If you can, based on a set formula known as the Means Test you will not be eligible to file a chapter 7. So, the court will either dismiss your bankruptcy case, or you may choose to convert your case to chapter 13.
The means test compares your excess monthly income to the amount of unsecured debt to determine how much you could repay to creditors if you were in a chapter 13. Because this calculation is hypothetical and does not necessarily reflect your true financial condition, you may appear to be able to repay the minimum portion of your debts but you, in reality, cannot. In that situation, the court may permit you to stay in chapter 7. Unfortunately, the means test is quite complicated and it is wise to seek professional assistance when choosing the chapter under which to file.  Please contact me to determine if you qualify for Chapter 7 bankruptcy.

Chapter13 Eligibility
There are two principal requirements for eligibility in a chapter 13 case. First, you must have regular income, although this need not be from a job; regular benefit payments or rental income would qualify. Second,you must not have debts over a certain amount. The debt limits are $1,010,650 in secured debt (like home mortgages and auto loans), and $336,900 in unsecured debt (like most credit card debt). These numbers go up periodically. 

5. How does bankruptcy help me in the short run?

The filing of bankruptcy automatically imposes an injunction against all collection efforts by creditors, which means creditors must stop calling, sending letters or suing you over your debts. This is called the automatic stay, discussed in more detail below.

6. What is a discharge?

If a debt is discharged, you no longer have an obligation to pay the debt, and the creditor may not make any effort to compel you to repay. However, if some other person (such as a relative or friend) also has an obligation to pay, his/her obligation is not discharged. In addition, if you have property that is collateral for a loan, the creditor may still be able to repossess that collateral.

7. Do all debts get discharged?

No, not all debts will be discharged through the bankruptcy, even if you have satisfactorily performed all your duties in your case. First, a bankruptcy case only discharges debts that you owed and scheduled at the time you filed the case, not those you incurred after filing the case.
Debts that are not discharged include debts for certain taxes, certain unscheduled debts (creditors with debts not listed in your paperwork), alimony, maintenance or support debts, pre-petition fines or restitution, debts for injury or death caused by use of drugs or alcohol, most student loans and certain condo or co-op fees. Other debts that may not be discharged include debts you may have incurred through fraud or by willful or malicious actions. If the creditor does not ask the court to rule on these debts, they will be discharged.

8. How much does it cost to file bankruptcy?

The current filing fee for a chapter 7 case is $299 and for a chapter 13 case is $274. Some courts also impose an additional administrative fee. You may pay the filing fee in installments. The court may waive the filing fee in a chapter 7 case if your income is below specified levels and the court finds that you cannot pay the filing fee in installments.