Prior to 2005, just about everyone qualified to file Chapter 7 bankruptcy. Congress believed that too many people were abusing the system and wanted to make some drastic changes to the bankruptcy code. Congress believed that many people that were filing bankruptcy were capable of paying back at least a portion of their debts. In October 2005, Congress signed into law the BAPCPA of 2005 which included a means test to qualify individuals filing Chapter 7 bankruptcy. Also added to the bankruptcy code was a mandatory pre-bankruptcy credit counseling course and a post-Bankruptcy financial management course. After seeing how the government is dealing with the US finances maybe it's time they take some of their own advice and learn about basic economics and budgeting before serving in Congress.
There are two common terms that people run into when researching a bankruptcy filing. Both of these are part of the qualification to file Chapter 7 bankruptcy. The first one is the median income test. The median income is calculated by taking the last six months of the household income prior to the current month of the person filing bankruptcy. Next, they divide it by six and multiply it by 12 to get the average household income for that individual. That number will be compared against the median income chart for the state that the person lives in and the size of their family. And if the person's income is lower than the amount found on the chart they should be able to file Chapter 7 bankruptcy. If the amount is higher, there is a good chance they might have to file Chapter 13 bankruptcy. This is not an end-all and should be discussed with a bankruptcy attorney because there are some other factors that can be included in the formula.
The next term heard frequently is the means test. The purpose of the means test is to determine whether an individual has sufficient disposable income to fund a Chapter 13 bankruptcy. The means test is part of the bankruptcy petition and has the individual fill out an income and expense report to make sure the individual doesn't have more than $150 a month left over in disposable income to file Chapter 7. This is why the bankruptcy attorney will make it clear to the individual filing, to include all of their expenses. Where some people get tripped up is they consider their credit payments to be expenses. In reality, you can't include these because these debts will go away in the bankruptcy discharge. Expenses include food, housing, transportation, work expenses, clothing, child care and any medical related expenses. Many bankruptcy courts are fair using the actual expense but some courts require the individual to use the IRS allowed amounts for household expenses.
Both of these formulas work together when qualifying someone to file Chapter 7 bankruptcy. Some people make slightly more money than the median income but easily qualify because of the means test. On the other hand, there are some individuals that make less than the median income but have very low expenses. All of their budget goes to paying credit card debt or personal loans and cannot be included in the means test. They will have too much disposable cash and might be forced into a Chapter 13 bankruptcy. For these individuals it's best to consult a bankruptcy attorney to see what could be done.
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