Bankruptcy Reform Legislation
There is a lot of uncertainty about the new “means test” requirement under the new bankruptcy law that took effect on October 17, 2005. The courts will apply the means test to decide whether a debtor is qualified to file under Chapter 7 or Chapter 13. In order to help customers better understand how the means test operates and how it may affect them, this article will provide a straightforward explanation.
Most people who consider bankruptcy are likely to focus on Chapter 7, which typically results in a complete discharge of all unsecured obligations. Chapter 7 bankruptcy allows a debtor to discharge all of their unsecured debts and start over financially. In Chapter 13, however, the debtor must repay a substantial percentage of their debt over a period of 3 to 5 years, with 5 years being the norm under the new rule.
One of the most popular reasons for filing under Chapter 13 prior to the passage of the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005” was to protect equity in a home or other valuables. The new laws will require many people to file under Chapter 13 even if they have no equity; therefore, this will continue to be a major reason why people prefer Chapter 13 over Chapter 7. That’s because the debtor’s income will be factored into the “means test.”
When determining whether or not a debtor meets the means test, the court will compare the debtor’s median income in the six months prior to the bankruptcy filing with the median income in the state. In California, for instance, a single wage earner can expect to bring in around $42,012 annually. If monthly earnings are significantly lower than the average, filing for Chapter 7 bankruptcy may be a viable choice. The remainder of the means test is only used if the income is above the median.
Now comes the part where things start to become complicated. Income minus necessary living expenditures (not including payments on debts included in the bankruptcy) is then multiplied by 60 to get a monthly repayment amount. This is the expected revenue that can be used to pay off the debt during the next five years.
Chapter 13 is necessary if the disposable income available for debt payments over the next five years is $10,000 or more. That is to say, if one has a monthly income of more than $166.67 and is making more than the state median, then Chapter 7 bankruptcy protection will be granted. If the court rules that you earn an extra $200 each month after covering basic expenses, that’s $12,000 per year. Since $12,000 is more than $10,000, Chapter 13 is your only option.
What if your income is above average but you still can’t afford to put away $166.67 every month toward your debts? The final step of the means test is then conducted. The possibility of filing for Chapter 7 bankruptcy reopens if the monthly income is less than $100. Using a debt-to-income ratio of 25% as a floor, we can determine if the disposable income is $100 or $166.66.
In other words, if you have a higher-than-average salary but can only set aside $125 per month since your debts total $50,000, Multiplying $125 by 60 months (five years) yields a grand total of $7,500. Due to the fact that 75% of $50,000 is still $33,750, filing under Chapter 7 is still an option for you. Having $25,000 in debt would mean that your $7,500 in disposable income is more than 25% of your debt, making Chapter 13 bankruptcy the appropriate option.
To sum up, first determine if your income is higher than or lower than the state median income (median income numbers are accessible at http://www.new-bankruptcy-law-info.com). If you and your partner are supporting a family, both of your incomes should be considered. After that, multiply 60 times the difference between your monthly income and your typical monthly living expenses. When the sum is greater than $10,000, filing for Chapter 13 is your only option. You may still qualify for Chapter 7 if the total is less than $6,000. Check the 25% rule if the sum is between $6,000 and $10,000. As soon as your debt-to-equity ratio rises above 25%, Chapter 13 is virtually inevitable.
One crucial facet of the new bankruptcy legislation that I have neglected in these cases is As was previously said, after reducing necessary monthly living expenses from income, the remaining amount can be applied to debt repayment. The court will utilize the IRS’s schedules to calculate your taxable income and allowable deductions for living expenses, rather than your own records. Most people’s family budgets won’t be able to handle the cold, hard truth of the IRS-approved numbers, which is a major issue.
It’s important to remember that the court can find against you even if you think you’re “safe” and can file Chapter 7 since you don’t have $100 per month in extra expenses, and instead push you into Chapter 13. It’s possible that some of your real costs won’t be reimbursed. How the courts will deal with cases where mortgage or rental prices are inflated much above government schedules remains to be seen. Will the debtor be asked to downsize their living arrangements to comply with the court’s ordered budget? There are currently no known solutions to these problems. As cases move through the system, it will be up to the courts to determine how the new law applies in practice.
