Of all the various chapters for filing bankruptcy in the US, chapters 7 and 13 are the most popular. In fact 85% of all filings are under chapter 7, probably as this is perceived as the “best” type of bankruptcy, leaving the debtor free from any debt on discharge, unlike chapter 13 where debts have to be repaid under a repayment plan.
Even though all the individuals possessions are sold under chapter 7, the end result of freedom from debt makes chapter 7 the most popular for the debtor, but perhaps the least popular for the creditor.
This is because that although the debtor loses virtually everything, the creditor often recovers very little.
In the past, creditors lost out when sometimes they need not have done, as some people hid the true size of their wealth and used chapter 7 merely to get rid of debt that they could have afforded to repay, had their debts been restructured under a chapter 13 filing.
Therefore, 2005 saw the introduction of a compulsory means test for individuals seeking chapter 7 bankruptcy, failure of which would automatically push them into a chapter 13 filing, which is a 3-5 year repayment plan.
The means test has a number of stages, the first being a calculation of the debtor’s disposable income, based on their earnings over the previous 6 months and deducting various living expenses.
The first stage is to calculate what the applicant’s disposable income has been over the previous 6 months. In other words deducting what the court considers to be reasonable amounts for living expenses for example and seeing what’s left.
There are then two more steps. The first takes your previously calculated “disposable income” figure and compares this against the median income for a family of the same size in your state. If your income is less than this, you do not need to take part 2 of the test as you automatically qualify for chapter 7.
If you income is found to be greater than the median then you have to go through some complicated calculations. The problem an individual faces once they fail the first part of the test, is determining if your “disposable income” figure is sufficient, after paying monthly “allowed” expenses, to pay at least a proportion of your unsecured debts (credit cards for example).
The point is that you should really get professional legal advice before filing bankruptcy, so you can be properly prepared.
Bankruptcy is a drastic step, in spite of what other people may tell you. It can devastate your financial future as your credit score drops. Although chapter 7 is the most common form of bankruptcy, it may be worth looking at chapter 13 bankruptcy law. If you would like further free information and advice, visit www.chapter13bankruptcylaw.net.
