The Bankruptcy Means Test

Posted on May 23, 2013 by Staff Writer

Back in 2005, President George W. Bush signed a new bill into law on October 17^th. It was the Bankruptcy Abuse Prevention and Consumer Protection Act and changed the ways that bankruptcies are managed in the United States. One way is by compelling filers to receive certified credit counseling as a step to securing a bankruptcy. Another way that the bankruptcy process has been changed is by creating a “means test” to qualify for bankruptcy.

This “means test” is necessary because of differences between Chapter 7 and Chapter 13 bankruptcy. Chapter 7 is also known as a liquidation bankruptcy because it discharges most debts through the sale of a debtor’s assets. Chapter 13, on the other hand, is a reorganization of debts. It allows you to keep most of your assets but sets up a repayment plan which lasts up to 5 years.

To qualify for a Chapter 7 bankruptcy, one important form that must be filled out is the “means test”. It is one of the ways to qualify for a liquidation bankruptcy. The “means test” reviews your current monthly income to see if you are able to repay your creditors in a Chapter 13 bankruptcy. If you can’t, then you are eligible to file for a Chapter 7 bankruptcy.

Current monthly income is an average of the six months leading up to your filing consisting of complete calendar months. This is all income from work, insurance, unemployment compensation, interest, and other forms of money earned. It is not including payments that were earned from previous months but paid in the six month period.

This will provide an accurate picture of your household income, which will be reviewed in two different ways. If your monthly income is below the median income for the same size household in your state, you qualify for a Chapter 7 bankruptcy. If it does exceed the median income, the rest of the “means test” will see if you have enough “disposable income” to repay your bills. For more information about bankruptcy or to file, contact an experienced bankruptcy attorney in Phoenix today.

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New Bankruptcy Laws Possible in Arizona

Posted on April 23, 2013 by Staff Writer

New bankruptcy laws may be enacted soon in Arizona, according to VerdeNews.com. The new laws have been proposed by the head of the House Judiciary Committee in an effort to “update Arizona’s dated and sometimes anachronistic bankruptcy laws,” according to VerdeNews.com. There wouldn’t be anything in the new laws that would allow individuals to seek protection from creditors, however, because “those are set in federal law.” That same federal law, however, allows each state to determine just what assets a person filing for bankruptcy can keep, and Representative Eddie Farnsworth, the lawmaker seeking change for Arizona laws, said that the “list for Arizona is long overdue for an overhaul.”

An example of this is that if a person in Arizona files for bankruptcy, law allows him to keep “one kitchen table and one dining room table with four chairs each.” Other permissible items, according to VerdeNews.com, include “three living room lamps, one radio alarm clock, one vacuum cleaner, and a choice of one television set, radio or stereo.” Yet the total value of all these cannot exceed $4,000. This law doesn’t allow for the inclusion of family heirlooms. “One person may have a hutch from their great grandmother that they want,” Farnsworth said. His revision to the law would give more flexibility to people filing bankruptcy when it comes to deciding which specific pieces they’d like to keep when breaking up their home.

Arizona was one of the hardest-hit states in the economic recession, experiencing more personal bankruptcy filings than the average state. Yet those numbers are dropping, according to Arizona Bankruptcy Court statistics. The district including Phoenix, Tucson, and Yuma, for example, had 22 percent less bankruptcy filings in 2012 than in 2011—from 35,072 total filings in 2011 to 27,298 total filings in 2012.

That doesn’t mean, of course, that all residents in Arizona are in the clear. If you or someone you know is considering bankruptcy, the most important first step is to seek the counsel of an attorney. Don’t go through it alone. Contact a dedicated Arizona bankruptcy lawyer today.

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How do I know if I qualify for a Chapter 7 Bankruptcy?

Posted on February 24, 2013 by Staff Writer

Determining whether or not a person can qualify for a Chapter 7 bankruptcy is one of the most complex areas of consumer bankruptcy. The means test is used to determine who can file for Chapter 7 bankruptcy and who must file a Chapter 13. The means test was introduced to the Bankruptcy Code in 2005 and is designed to limit those individuals eligible to file for Chapter 7 bankruptcy.

The Chapter 7 bankruptcy means test compares your current monthly income against the median income for households similar in size to those in your same state. The means test looks at the average household income over the six months prior to filing. If your income is below that of the average household income for your state then you will automatically qualify for a Chapter 7 bankruptcy.

Now if your household income exceeds the median income for households of a similar size in your state you still may be able to qualify for a Chapter 7. This is because certain expenses are deducted from your current monthly income in order to determine your net monthly income. Now not all expenses are qualifying expenses, however, the following kinds of costs can be deducted: child support, alimony, tax withholding costs, health savings account, garnishments, certain utilities and several other types of expenses.

However, if you still do not qualify for a Chapter 7 even after deducting the qualified expenses you can still file bankruptcy. For most people who do not qualify for Chapter 7 bankruptcy because of their high income file Chapter 13 bankruptcy. Chapter 13 bankruptcy is a reorganization of your debts. The bankruptcy last for 3 to 5 years during which time you make payments to your creditors. At the end of the bankruptcy whatever balances are left over will be discharged.

The means test is one of the most complex areas of consumer bankruptcy so please speak with one of our bankruptcy attorneys to look at your individual situation. Don’t subject yourself to a Chapter 13 bankruptcy without first speaking to our experienced attorneys.