Many individuals and couples considering bankruptcy wonder whether they qualify for bankruptcy, especially with the confusion brought on by the massive overhaul of the bankruptcy code in 2005.
In Chapter 13 cases, which require that some debt be paid back through a plan, the test for qualifying can be complex. Generally, the debtor’s income must exceed basic living expenses in order to have money available to make the required payments set forth by the plan. The plan is usually prepared with the help of an attorney as Chapter 13 plans can become complex.
In Chapter 7 cases, where unsecured debts are usually discharged in their entirety (with some exceptions), qualifying is normally determined by income. The 2005 bankruptcy legislation created a “means test” that acts as the primary indicator of whether a debtor qualifies for Chapter 7.
The means test puts a heavy weight on income received in the six-month period just before the bankruptcy is filed. If income is low during that time, and there is no expectation of a significant increase in income after the filing date, the chances are better that the debtor will qualify and avoid “abuse” motions from the Chapter 7 trustee or United States trustee.
The means test first examines whether the recent income (last six months) falls below the “median” income for the state they live in. The median income is different from state to state, and rises with larger family sizes. If the debtor’s income exceeds the median, the means test looks toward basic living expenses, including mortgage payments and car payments to see if the debtor qualifies anyway. Not all expenses that a debtor may have will necessarily count toward the test. The IRS codes have some standard expense amounts that must be used, and they may differ from a debtor’s actual expenses. The amount of debt to be discharged can factor into the overall equation as well, but those debts are not considered as expenses in the means test.
Even if a debtor appears to qualify under the means test, abuse motions can still be filed if other factors are present that might disqualify a debtor from Chapter 7 bankruptcy. Common grounds include fraud or an expected increase in income that would allow payment of some or all of the debt. It is usually best to consult with an attorney for a full analysis prior to filing.
For more information or a consultation, please call 661-210-5657 or e-mail mjf4bk@ca.rr.com .