Generally speaking, if you have debts or obligations you cannot handle, or other financial difficulties, a way to resolve the situation is to file for bankruptcy. For most individuals there are two types of bankruptcy – chapter 7 and chapter 13. Chapter 7 is often called “straight bankruptcy” and with it you are allowed to completely eliminate much of your debt. Chapter 13 is often called “reorganization” and you typically have to pay what you can legally afford of your debts over a 5 year period of time.
In 2005 the credit card companies in particular, but all creditors, pushed through Congress, and the President Bush signed, bankruptcy reform legislation because they feared that too many people were filing Chapter 7 bankruptcy when they could afford to pay back a good part of their debt. That seems a little outrageous, and from my experience, if true, it was certainly far and few between, but that is what happened.
Congress and the President Bush did not do away with Chapter 7 bankruptcy. They just created what is known as a “means test” in order to determine if you have to file Chapter 7 bankruptcy, which allows you to completely eliminate most of your unsecured debt, or whether you have to file under some other chapter of the Bankruptcy Code.
Most people who were eligible to file Chapter 7 before the new laws pass, still qualify for Chapter 7 bankruptcy protection now. Only it is more difficult to make that determination. Often times the bankruptcy attorney has to work harder to help you make that determination, and often has to employ complicated software to assist.
The complete details of the means test are a bit too detailed to explain here. However, a person’s income must be below the median income for the state in which they are a resident in order to automatically qualify for a Chapter 7. Also, a person cannot have non-exempt assets that could cover at 25% of their debt. The new laws do, of course, have some flexibility in them for both actual and exceptional circumstances.
Just because it can get complicated, do not let this scare you into not inquiring about your options. That is why my office, for example, provides for a FREE, NO OBLIGATION interview or consultation. It allows you to gain valuable information before you have to make any decision. Just contact me for this FREE, NO OBLIGATION consult.
Also, because it gets a little complicated sometimes, some people mistakenly believe that they must be completely penniless in order to use Chapter 7, because of this new requirement. This is is not true either. Even under the new law, some people can still earn significant monthly income and still qualify for Chapter 7 bankruptcy. Even more important, the ones who would have become eligible for Chapter 7 bankruptcy under the old law can still successfully apply for Chapter 7 bankruptcy under the new law.
What is very important to keep in mind is that the Chapter 7 bankruptcy means test has been practically created in order to limit the use of only those who truly cannot pay their debts. The Chapter 7 bankruptcy means test deducts specific monthly expenses from your “current monthly income”, in order to arrive at your monthly “disposable income”. The more likely you will not be allowed to use Chapter 7, as the higher your disposable income gets.
So, as stated before, you must first determine whether your income is more or less than the median income in your state. If you are above the median income for your state, then you must figure out whether you would have enough left over, after subtracting certain expenses, to repay some of your debt. If you do not have enough disposable income left over, then you may still qualify for a Chapter 7 bankruptcy.