Monday, May 9, 2011

I Need to File Chapter 7 But I Make Too Much Money

The changes to Bankruptcy Laws in 2005 did make it more difficult for some people to file for a chapter 7 bankruptcy due to the new means test requirement. This law imposes on debtors an eligibility rule designed to keep those with the ability to repay their debt from getting a chapter 7 discharge and "fresh start".

However, many people are under the impression that simply making a lot of money is enough to keep them from getting a chapter 7 discharge. This is not necessarily the case, and it's actually a little more complicated than that.

The Means Test: Just What it Sounds Like
The means test is designed to determine if a chapter 7 petitioners has the "means" to repay their debts, either outside of bankruptcy or in a chapter 13 repayment plan.

Simply having a high income does not bar you from filing a chapter 7 bankruptcy. Many people with a large income are still unable to repay their debts due to significant monthly expenses.

Imagine you make $150,000 and you live in California. You obviously make much more than the state median, which varies from around $50,000 to $120,000, depending on the size of the household. This does not mean chapter 7 is out of the question, but it does mean you will have to pass the means test.

How Does it Work?
The means test is simply a complex set of calculations that takes into account your previous six months of income, annualizes it, and compares it to the monthly expenses you have.

For example, if you own an expensive home you may have a very large monthly mortgage payment. Much of your $150,000 income may go to paying that, along with your other monthly bills. This may be enough that also making your credit card payments is simply not feasible.

The means test is designed to uncover whether your income is enough to repay your debts AFTER all of your monthly expenses. The end result is that your income is less of an issue, and your "disposable" income, that is, the money you have left over after expenses, is the issue.

What if I Can't Pass the Means Test?
If it turns out that your disposable income is enough to repay your debts, or at least some of your debts, then you can still find relief through a chapter 13 bankruptcy. In this type, you get into a payment plan under which some of your debts will be repaid, based on your available disposable income. Debts that cannot be repaid will then be discharged upon the completion of the three to five year payment plan.

In many cases, a chapter 13 plan can help you by lowering your monthly bills, often drastically, and canceling some unsecured debts, commonly somewhere between 50-80%.

Want to find out if you pass the means test? See this page about the bankruptcy means test on Nolo.com.

For more information about bankruptcy, and which type to file, see the following guides on BankruptcyLawFirms.com.
  1. Deciding on Bankruptcy
  2. A Comparison of Chapter 7 and Chapter 13 Bankruptcy

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