Bankruptcy Means Test – Which Chapter is for You?

What are the qualifications for an individual/couple to file for Bankruptcy?  The answer to this question is simple  — there are no qualifications for filing Bankruptcy.  Everyone has the right to file a petition for relief under the Bankruptcy Code.  All one has to do is file a Petition for Relief with the Bankruptcy Court.  What type of bankruptcy an individual/couple can file does have certain qualifications.

For most of us, the choice is between filing a Chapter 7 bankruptcy in which one requests relief in the form of debt forgiveness of most of his/her debts or Chapter 13 bankruptcy in which one agrees to pay all or a portion of one’s debts over a period that varies between 3 to 5 years with certain exceptions such as your home mortgage.  How much gets paid back depends on how much “disposal income” a person has.  In general, this means how much money you have left over after paying your monthly expenses without considering the debts to be included in the Bankruptcy.

In 2005, the Bankruptcy Code amended one of the major features of which was to require a person to meet an income and expense test in order to qualify for Chapter 7.  This test is known as the “Means Test”.  Certain classes of people are exempt from the Means Test such as if a person’s debts are more than 50% business related and certain types of income are excluded such as social security income.  If you do not qualify under the Means Test to file a Chapter 7 then you have the option of filing a Chapter 13.  If you qualify under the Means Test then you can file a Chapter 7 or a Chapter 13.  The Means Test is divided into two (2) distinct parts.  The first part is based strictly on  gross income for the six (6) months preceding the filing of a Bankruptcy case.  How much gross income allowed is dependent upon what state the person lives in and the size of the family unit.  If one exceeds the gross income test then the second part of the test comes into play which takes into consideration certain deductions, some of which are standardized and some of which are variable.  For example, housing.  If one rents then a deduction for housing is standardized based upon the county in which a person resides. If you own a home a deduction is allowed for the full mortgage payment including escrow for insurance and taxes.  There are standardized deductions for food and a variable deduction allowed for contributions to one’s church.  At the end of the second part of the test a determination is made as to whether a person has sufficient disposable income to pay a percentage of unsecured debts to creditors.

In general, anyone can file Bankruptcy but must meet certain qualifications to file Chapter 7.  There are other types of bankruptcy that addresses certain specific situations such as chapter 12 which deals with farmers that are experiencing financial difficulty, Chapter 11 for businesses and  individuals with special problems.  For most of us, the choice is between Chapter 7 and Chapter 13 of the Bankruptcy Code.

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