Chapter 7 bankruptcy is usually more desirable than Chapter 13 bankruptcy to the financially distressed, as there are no payments involved and it allows them to get rid of more debt faster.
But not everyone is eligible for Chapter 7.
Those making more than a certain amount will have to pass a means test to declare Chapter 7 bankruptcy, and if they fail the test, Chapter 13 will be their only option.
What’s the difference between Chapter 7 and Chapter 13?
Chapter 7 is a liquidation bankruptcy. If you file for Chapter 7, a trustee is given the task of selling off your nonexempt property (one car, necessary clothing, and household appliances are among the items often considered exempt property), and the revenue that generates goes toward paying off your debts. If you don’t have any nonexempt property to sell, your creditors don’t get anything.
Chapter 13 is a reorganization bankruptcy. You keep all or most of your property, but you have to reimburse your creditors with a payment plan.
What’s the means test?
Chapter 7 is intended to be reserved as a last resort for people who are truly in need of assistance. The means test is designed to stop those who have a lot of money from taking advantage of a program made for those who have little. It is meant to gauge and analyze your means of paying back your creditors.
Who is exempt?
Households that make less than the state median income for households of their size are exempt from the means test. You are also exempt from the means test if your debts are not primarily consumer debts.
Another group that is exempt from the means test are disabled veterans who accumulated most of their debt while on active duty.
What does it take to pass?
If you make more than the state median income, then things get tricky. There are so many factors at play here that you’ll want to hire an experienced bankruptcy lawyer to help you through it all.
One prominent portion of the test involves you calculating your income against what are deemed “allowable” expenses by the IRS, and the amount left over is known as your “disposable income.”
If your disposable income works out to less than $7,500 a month, then you’ll probably pass the test. If your disposable income is more than $12,500 a month, you probably won’t. For that gray area in between $7,500 and $12,500 a month, additional testing is required.
If you are considering filing for bankruptcy it is essential that you sit down with a skilled attorney to discuss all your options, the implications of your choices, and your best course of action. Contact Arnold, Wadsworth & Coggins today and let’s talk.
