A Bankruptcy Lawyer’s Blog

Chapter 7 Bankruptcy The Means Test

Of all the various chapters for filing bankruptcy in the US, chapters 7 and 13 are the most popular. In fact 85% of all filings are under chapter 7, probably as this is perceived as the “best” type of bankruptcy, leaving the debtor free from any debt on discharge, unlike chapter 13 where debts have to be repaid under a repayment plan.

This is despite the fact that in chapter 7 all assets are sold to repay as much money as possible.

Unfortunately for the creditors, a chapter 7 bankruptcy will often leave them financially out of pocket by a large amount.

In the past, creditors lost out when sometimes they need not have done, as some people hid the true size of their wealth and used chapter 7 merely to get rid of debt that they could have afforded to repay, had their debts been restructured under a chapter 13 filing.

To get over this problem, the 2005 Bankruptcy Abuse prevention and Consumer Protection Act bought in a means test. This is only applicable to individuals and consumer debt.

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.

If this works out at less than the median income for a household of the same size in the same state you immediately pass the means test and qualify for chapter 7.

If you fail this part it gets a little complicated, as the court then decides if you are in a position to pay off at least some of your unsecured debt.

This can vary from state to state, as they all have different ideas on what reasonable living expenses are. In other words, you may find that you have very little left to live on, but are forced into a chapter 13 bankruptcy, where debt is repaid over 3-5 years.

The point is that you should really get professional legal advice before filing bankruptcy, so you can be properly prepared.

For further free advice and information on declaring yourself bankrupt have a look at www.declaringyourselfbankrupt.net which has advice on many aspects of personal bankruptcy and it’s consequences, including ways of avoiding bankruptcy altogether.