Helping Clients Navigate Bankruptcy Means Tests

Dealing with overwhelming debt can be incredibly stressful, and for some, filing for bankruptcy becomes a viable option to get a fresh start. However, before deciding on a bankruptcy chapter, debtors must first navigate the bankruptcy means test, a critical aspect of the process. 

The bankruptcy means test was introduced as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Its primary purpose is to assess a debtor's financial situation and determine their eligibility for Chapter 7 bankruptcy. Chapter 7 is a liquidation bankruptcy that discharges most unsecured debts, offering a relatively swift and comprehensive debt relief. However, not everyone can qualify for Chapter 7 bankruptcy due to the means test.

Step-by-Step Guide to the Bankruptcy Means Test

The means test involves two steps:

1. Comparing Income to State Median: Initially, debtors must compare their average monthly income over the six months before filing bankruptcy to the median income for a household of their size in their state. If their income is below the median, they automatically qualify for Chapter 7 bankruptcy.

2. Calculating Disposable Income: Debtors whose income exceeds the state median must proceed to the second step, which involves calculating their disposable income. This is done by deducting certain allowable expenses, based on IRS standards, from their monthly income. The resulting disposable income is then used to determine if the debtor can afford to repay some of their debts through a Chapter 13 repayment plan.

Qualifying for Chapter 7 Bankruptcy

If the debtor's disposable income falls below a certain threshold, they pass the means test and are eligible to file for Chapter 7 bankruptcy. However, if their disposable income exceeds the threshold, they may be required to consider Chapter 13 bankruptcy instead.

Exploring Chapter 13 Bankruptcy as an Alternative

For debtors whose income is above the Chapter 7 threshold, Chapter 13 bankruptcy may still offer a viable solution. In Chapter 13, debtors propose a repayment plan to repay their debts over three to five years. While it requires a longer commitment, it allows debtors to retain their assets and catch up on overdue payments, such as mortgage arrears.

Understanding Means Test Exemptions and Considerations

Certain debtors may be exempt from the means test, such as disabled veterans or those whose debts are primarily non-consumer debts. Additionally, if the majority of a debtor's debts are not consumer debts, they may not need to undergo the means test.

Choose Compassionate Counsel for Your Bankruptcy Needs 

Bankruptcy is a complex legal process that can be confusing and overwhelming. With so much at stake and many questions to be answered, you need a bankruptcy attorney who can help you through each step of the process. At Compassionate Counsel, we have been helping clients through the bankruptcy process for over 20 years, and we can help you, too.

At our firm, we understand that bankruptcy is often the last resort for people who have tried to solve their debt problems through other means. We will work with you to determine if bankruptcy is the right option for you and what kind of bankruptcy is best for your situation.

If you are considering Chapter 7 Bankruptcy in Scottsdale, contact us online or call (623) 294-5705 for a free consultation with our dedicated team.

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