Short Guide to Bankruptcy
Laws
Page 2
Let's take a closer look at how
the new law works.
Before you can file either a
Chapter 7 or Chapter 13 bankruptcy claim, you
must attend a 90 minute credit counseling meeting
with an approved agency within 180 days of filing
a petition. This meeting is designed to give you
an idea of whether you should file for bankruptcy
or if an informal payment plan would help you get
your financial affairs in order. This meeting is
not free and is estimated to cost around $75.
| Counseling is
required even if it's obvious that a
repayment plan isn't feasible or you are
facing debts that you find unfair and
don't want to pay. You are required only
to participate, not to go along with any
repayment plan the agency proposes.
However, if the agency does come up with
a repayment plan, you will have to submit
it to the court, along with a certificate
showing that you completed the
counseling, before you can file for
bankruptcy. (2) If you do enter
bankruptcy, more meetings are required
(basic money management type) before your
case can be discharged. We'll talk more
about this later.
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If you have
decided that bankruptcy is your best option, you
must first take a Means Test to determine whether
you can file for Chapter 7. The first step of the
Means Test involves measuring your currently
monthly income against the median income for a
similar size family in your state. Your currently
monthly income is your income average over the
last six months before you file. It's important
to point out that if you've lost your job
recently, and your income has dropped to whatever
unemployment insurance provides, the court will
still use the six month average!
Now, if this six month average is
higher then your state's median, you cannot file
Chapter 7, you have to file Chapter 13. However,
if your income is above the median income, you
cannot be forced into Chapter 13 unless you have
at least $100 a month left over at the end of the
month after deducting certain allowed
expenses.(1)
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The second part of the means
test can be most easily described as this
mathematical example:
Currently monthly income
- allowable expenses = money left for
creditors.
Your currently monthly
income is determined as described above,
no matter if you just recently lost your
job or not. Here's the other kicker: Your
allowable expenses are not determined by
you, but by IRS determined
"allowable amounts." - These
amounts as determined by the IRS are not
based on reality.
Generally, you cannot
subtract what you actually spend for
things like transportation, food,
clothing,
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and so on:
instead, you have to use the limits the IRS
imposes, which may be lower than the cost of
living your area. The allowances for this means
test are posted here:
This Means Test is not black and
white and is actually quite complicated to figure
out to a satisfactory point to where the Trustee
and bankruptcy judge won't think you are trying
to abuse the system. This is where your attorney
comes in and earns part of his or her fee (which
has also increased due to the increased work and
liability of the new law. More on this later).
However, the general rule of
thumb for the means test is if your total monthly
disposable income is less then $100, you pass. If
your disposable income is between $100 and $166,
and if this amount times 60 (12 months X 5 years
= 60) would pay at least 25 percent on UNSECURED
CLAIMS (credit cards, not your house or car which
is secured) then you flunk the Means Test. If
that amount is less then 25 percent of unsecured
claims, you pass.
"If what is left is
between $100 and $166, AND if this amount times
60 is not enough to pay at least 25 percent of
all of the debtor's unsecured claims over 5
years, then the debtor is has again passed the
means test and there is no presumption of
abuse." (1)
| If it is
more then $166.66, you flunk and are
prohibited from filing Chapter 7 UNLESS
you can prove special circumstances to
the bankruptcy judge. However, this
involves more filing, court appearances
and work on the part of your attorney
which will end up costing you more to
prove your case. If your Means Test shows
you can pay $166.66 or more per month,
you must do a Chapter 13 under a 5 year
plan. The 3 year plan option is not
available to you. NOTE: These
requirements have been eased for
Hurricane Victims. However, no special
easing of requirements have been put into
place for those who file bankruptcy for
medical reasons. If you get cancer or are
injured in a car accident, the federal
government says "too bad"
unless you can prove your special
circumstances to a judge.
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Other
Changes to the Law...
How To Pay Off
Your Credit Cards | 101 Great
Money Saving Tips
Guide
To Bankruptcy Laws | Guide to
Foreclosure Laws | Guide To
Consumer Credit Counseling
Additional
Information
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