When you’re looking to file for personal bankruptcy protection, there are generally two options—a Chapter 7 liquidation proceeding and a Chapter 13 “Wage Earner’s Plan.” For most of the history of American bankruptcy law, there were few limits on which route you could choose. However, in 2005, Congress made sweeping changes to the bankruptcy laws, making it much more difficult for a personal debtor to permanently discharge debts. Under those revisions, you must now submit to a “means test,” essentially designed to determine whether you have the resources to pay your creditors off over a specific period of time. If so, then you will be prohibited from filing a Chapter 7 petition.
Here’s how the test works:
- The first thing the bankruptcy court will look at is your current monthly income. That includes income from any source over the six months immediately preceding your bankruptcy filing, including wages, salary, unemployment, child support, alimony, investments and insurance payments. To arrive at the current monthly income, you’ll total all that income and divide by six.
- If your current monthly income is less than the median family income level in your state, for a family of your size, you automatically qualify to file a Chapter 7 petition. The median family amount varies from state to state, and is adjusted by the U.S. Census Bureau on an annual basis.
- If your current monthly income is greater than the median family income level for your state, you may still qualify to file a Chapter 7, but the process becomes more complicated. Under the test, you will have to determine if you have disposable income and how much you have. Certain expenses are allowed, so you’ll have to identify income and permitted expenses and see what’s left. If your disposable income falls below a certain level, you can still file a Chapter 7 bankruptcy.
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