The means test was added to the bankruptcy process by BAPCPA in 2005 to make it more difficult for some consumers to file for Chapter 7 bankruptcy.
The means test was added to the bankruptcy process by BAPCPA in 2005 to make it more difficult for some consumers to file for Chapter 7 bankruptcy. People with the ability to repay debts must instead file for Chapter 7 bankruptcy. 13.
Most individual debtors who file for bankruptcy relief are required to complete means test forms. The court uses the means test to determine if they can afford to pay their creditors.
If the total household income is below the state average income, the debtor has passed the means test and is eligible to file for Chapter 7 bankruptcy.
If the total household income is greater than the state average income, they must complete the means-tested formula. The means test subtracts taxes, insurance and other deductions from their paycheck and actual living expenses from gross income to determine disposable monthly income. This is the amount that must be committed each month to repay creditors.
Some of the deductions are determined by the personal budget, such as income tax, health insurance, childcare, charitable contributions, etc.
Some of the deductions are determined using the standard IRS allowance, such as rent, utilities, vehicle expenses, etc.
Here is an explanation of the decision between chapters 7 and 13:
First, divide all the debt between 2 buckets. It sounds silly, but stick with it, it makes sense.
Bucket 1 is the debt that debtors will continue to pay. Most taxes, child support arrears, and secured debts such as mortgages and car loans for property they wish to keep will go into compartment 1.
Bucket 2 is all they don’t want and don’t have to pay for. Credit cards, medical bills, payday loans and all other non-priority unsecured debt. Compartment 2 also contains secured debt for vehicles that are surrendered in bankruptcy.
Now there are two buckets to manage. Bucket 1 is what they will continue to pay, Bucket 2 is everything else.
Chapter 7 empties compartment 2 and lets debtors manage compartment 1 on their own. is probably the choice for them. It’s faster, easier and cheaper, but it doesn’t help them with their Tier 1 debt.
If debtors are behind on the house or the car and need help catching up, Chapter 13 is probably the chapter for them. Chapter 13 allows for a payment plan to be set up to pay off Group 1 debts or arrears and only as much as they can afford to pay Group 2 debts. Any Group 2 debt they do not can’t afford to pay. the life of the Chapter 13 payment plan is dropped as it would have been in a Chapter 7. Chapter 13 does not require that they pay 100% of all debts. Remember, however, that debtors must show the judge that they can afford to pay for whatever they have placed in bucket 1. If they cannot afford the car, for example, the court will require it to go into bucket 2. be rendered.
“There are a few other fact-specific issues that can push us one way or the other, such as income restrictions and debt limits. Our lawyers will help you understand everything during a free consultation appointment.
For more information, visit https://www.jeppsonlawoffice.com/means-test/
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