When it comes to personal bankruptcies, debtors are generally limited to two types: Chapter 7 and Chapter 13.
Chapter 7 bankruptcy allows debtors to wipe most debts from their record, but it comes at a price: you may lose a good amount of your possessions that are used to secure some of those debts. On the other hand, a Chapter 13 bankruptcy allows debtors to keep most of their possessions. Unfortunately, the payoff there is having to pay back at least some of your debts for up to five years.
Many debtors who may want to file for Chapter 7 bankruptcy may not be able to do so because they failed the means test. The means test is a calculation which will determine whether you or any other debtor may file for Chapter 7 based on your income or expenses. If your income is low enough, or your expenses are high enough, you will be able to pass the means test.
Step 1 of the Means Test
To determine whether or not you may file for Chapter 7 bankruptcy, you must first evaluate your income over the past six months. If your income is below the median income for a similarly sized family in your state, you have qualified for a Chapter 7 bankruptcy and do not need to proceed to Step 2. However…
Step 2 of the Means Test
If your income exceeds the state’s median family income, you will need to take a closer look at your expenses. To qualify for Chapter 7 after failing Step 1, certain expenses must total a certain amount against your income. Debtors may deduct so-called “allowed” expenses, which generally include things like food, transportation, rent, clothing, and utilities. Some other types of expenses are also allowed to be deducted, but it is best to consult with an experienced bankruptcy attorney, as the requirements often get confusing.
Once you have the difference between your monthly income and allowed expenses, you multiply that difference by 60. If that final calculation is less than a certain threshold (somewhere around 8 million) or less than 25 percent of your unsecured debt’s total value, you should be eligible for Chapter 7 bankruptcy.
Again, calculations to determine your eligibility for a Chapter 7 filing must comply with strict requirements; you should not try to do so on your own. Also, filing for Chapter 13 bankruptcy might even be the better option for you in the long run–even if you are eligible for Chapter 7 bankruptcy.
Your situation is unique, and you deserve a caring attorney who understands that. Hedtke Law Group has helped countless Californians confront their financial quandaries and come out the other side in strong positions. We offer free consultations to prospective clients; contact us today to see how our firm can help.