Filing bankruptcy enables a person to clear off his debts, prevent foreclosure and stop creditor harassment which is usually in the form of phone calls and letters. It is a useful tool for defaulters who need to get their debts eliminated or want some additional time for the repayment of bills and gives them an opportunity to resolve the problems in hand. Filing bankruptcy has helped millions of people to get out of their debts but a quick or uneducated decision can cause more problems than already present. Chapter 7 bankruptcy gives an opportunity for instant elimination of all unsecured debts like credit card debt and medical bills. It also offers protection for the filer's property and may be able to stop foreclosure.
The Chapter 7 Bankruptcy Means Test was included in the new bankruptcy law passed in 2005 and it is a formula designed to keep filers with higher incomes from filing for Chapter 7 bankruptcy in order to wipe out their debts altogether. A person can file for this if his monthly income is less than the median income in his state of residence. Only those filers with primarily consumer debts need to take the Means Test. If the household income of the filer exceeds the state median, the Means Test computations get significantly more complex. In such a case, the disposable income is calculated by deducting specific monthly expenses from the filer's current monthly income (the average income of the filer over six calendar months before he files for bankruptcy). A higher disposable income may result in a negative result in the test.
The goal of the test is to secure Chapter 7 bankruptcy only for those who have no means to pay back their debts. It also pushes the filers who have available income into Chapter 13 bankruptcy plans. The test is a bit complicated and involvement of a local bankruptcy lawyer becomes necessary in order to determine if the filer qualifies for Chapter 7 bankruptcy. As assumed by many people, it is not essential for the filer to be absolutely penniless in order qualify for this bankruptcy. If he has a lot of expenses including high mortgage payments, he can qualify for bankruptcy despite earning a significant monthly income.
It is also mandatory for a person to take an approved credit counseling course within the 6 months before he files Chapter 7 bankruptcy petition. In addition to that, such people should also obtain a debt management counseling, before being allowed to complete the bankruptcy process. To comply with such requirements, filers must work with agencies that have been approved by the U.S. Trustee Program. The agencies approved by the U.S. Trustee Program include agencies that provide pre-filing credit counseling and agencies that offer post-discharge debtor education to people undergoing the bankruptcy process.
In case the filer doesn't pass the Chapter 7 Bankruptcy Means Test, he can still apply for Chapter 13 bankruptcy. Unlike Chapter 7 bankruptcy which requires no repayment, Chapter 13 bankruptcy requires monthly payments over a five-year period, which is strictly monitored by the court. It provides an attractive alternative to handle specific problems like curing a default on a mortgage. However, despite all the provisions by the state, it is best to clear off debts in time, so that the situation of bankruptcy doesn't even arise.
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