Chapter 7 bankruptcies now require a "Means Test" to determine if a debtor qualifies for the debt discharge or has to file Chapter 13.
Bankruptcy has never been an easy concept in the best of times. Since the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) went into effect in 2005, it's been more difficult to understand. The BAPCPA makes it harder to qualify for Chapter 7 bankruptcy, which allows for the discharge of consumer debt and for debtors to have a fresh financial start.
The Means Test determines the debtor's income level by taking their average income for the 6 months previous to filing bankruptcy. Those making less than the State's Median Income Level automatically qualify for Chapter 7 bankruptcy. However, if the income level is higher than the Median Income, then the petitioner goes on to the second step.
The Means Test takes the average income for those higher than Median for the 6 months previous to filing, minus living expenses according to the IRS schedule - not including debt payments for creditors involved in the bankruptcy - and multiplies that total by 60, the number of monthly payments over 5 years. If the amount calculated available for repayment is more than $10,000 - or $166.67 a month - Chapter 7 bankruptcy is no longer an option. However, those considering navigating the Chapter 7 Means Test should know that the calculations regarding living expenses do not necessarily go by the petitioners actual living expenses but by an IRS schedule used for tax collection purposes. Some living expenses may be disallowed.
If the debtor can't pay at least $166.67 a month, then one final calculation is made. If the debtor can pay $100 - $166.67 a month, the amount is measure against the amount of debt. If in 5 years, the amount the debtor can pay is 25% or less than the amount owed, Chapter 7 is still viable.
With such complex calculations, it's important to consult a qualified bankruptcy lawyer to discuss which option is appropriate. Talking to a local attorney can take some of the fear and confusion out of filing bankruptcy. Bankruptcy attorneys know the laws and can evaluate individual financial situations.
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