subject: Chapter 7 Now Has A Means Test [print this page] The two most popular chapters for filing for bankruptcy in the US are chapters 7 and 13. Of the two, chapter 7 is probably the most popular, as it allows a completely fresh start financially, coming out of the proceedings with no debt, as opposed to chapter 13, which makes an individual repay their debts over time, by means of a repayment schedule, the terms of which can be harsh.
Even though all the individuals possessions are sold under chapter 7, the end result of freedom from debt makes chapter 7 the most popular for the debtor, but perhaps the least popular for the creditor.
The problem is that it is possible that the sale of an individuals assets will fall far short of the amount of money owed, leaving creditors out of pocket by some distance.
Often this is just a sad reality of life, but until a few years ago chapter 7 could be used by the unscrupulous simply to get rid of debt that they could in fact afford to repay, albeit with a little rearranging of their debts.
Therefore, 2005 saw the introduction of a compulsory means test for individuals seeking chapter 7 bankruptcy, failure of which would automatically push them into a chapter 13 filing, which is a 3-5 year repayment plan.
The means test has a number of stages, the first being a calculation of the debtor's disposable income, based on their earnings over the previous 6 months and deducting various living expenses.
The first stage is to calculate what the applicant's disposable income has been over the previous 6 months. In other words deducting what the court considers to be reasonable amounts for living expenses for example and seeing what's left.
If you fail this part it gets a little complicated, as the court then decides if you are in a position to pay off at least some of your unsecured debt.
This can vary from state to state, as they all have different ideas on what reasonable living expenses are. In other words, you may find that you have very little left to live on, but are forced into a chapter 13 bankruptcy, where debt is repaid over 3-5 years.
The point is that you should really get professional legal advice before filing bankruptcy, so you can be properly prepared.
