Of the six types of federal bankruptcies, Chapter 7 and Chapter 13 are the ones used commonly for personal bankruptcies. There are some important distinctions between these two chapters. At the heart of the differences is the fact that Chapter 7 is a liquidation bankruptcy. Nonexempt assets of yours will likely be seized to pay creditors, and most of your unsecured debts (debts with no collateral) will be discharged within a matter of months. Chapter 13, on the other hand, lets you keep your house and other collateral but subjects you to a 3-5 year repayment plan in which you start to pay your creditors.
Based on these distinctions, you can see why Chapter 7 is more attractive for many debtors. At its best, bankruptcy gives you a clean financial slate from which you may work diligently to rebuild your credit and finances on a solid foundation. However, not everyone is eligible for a Chapter 7 bankruptcy. To be eligible, you must first pass what is called the means test.
What is the Means Test?
The means test is a formula that figures your monthly income against your debts to determine if your situation warrants a Chapter 7 bankruptcy over a Chapter 13 filing. The basic tenet is that if you do not bring in enough money per month to even make a dent in your debts, then Chapter 7 is the way to go.
Step one: The first part of the means test is to calculate your household income and compare it to a similar-sized household in your state. If it is lower than the median amount, then you have passed the means test and can proceed to filing for Chapter 7 bankruptcy. If it is higher, then you must go to step two:
Step two: If your household income exceeds the median amount, then you must come up with your allowed expenses (these vary by state) and deduct them from your monthly income. If you have a certain amount left over (disposable income), then you have failed the means test and must pursue a Chapter 13 bankruptcy.
As a caveat, passing the means test does not automatically grant you a Chapter 7 bankruptcy. You must fill out a number of forms and report many aspects of your financial situation to the bankruptcy court to affirm that you can proceed with a Chapter 7 filing. Another caveat is that just because you are able to file for Chapter 7 does not mean this is the better choice for you.
Contact Blossom Law
We know, for a fact, that your best days are in front of you. Bankruptcy is not a dirty word. It is a useful tool for millions of Americans. Want to see if it’s the right path for you? Get in touch with Attorney Rashad Blossom today by calling 704-271-9078. We offer complimentary consultations to prospective clients (a $150 value -- free!)