Bankruptcy Lawyer Bryan W. Stone answers the question: “What is Chapter 7 Bankruptcy?”
Those without previous knowledge may not realize that Chapter 7 bankruptcy isn’t something that is automatically available to everyone. Instead, you must first qualify before a court will allow you to pursue a Chapter 7 liquidation bankruptcy. So what do you need to do to qualify? The bankruptcy code requires filers to pass what’s known as a means test. To learn more about the means tests and how they work, keep reading.
What is a means test?
First things first, the means tests only applies if you have primarily consumer debts; the means test can be avoided for those who are filing due to business debt. A means test exists because only some consumers are supposed to be able to file for Chapter 7 protection, those who lack sufficient disposable income to pay off or pay down their debts. The reason behind this is that those who are able to pay their debts, or at least some of their debts, should be made to enter into a Chapter 13 repayment plan rather than discharging their debts under a Chapter 7. Supporters of the means test claim that it helps combat bankruptcy abuse, though many believe there is little evidence to demonstrate that this is true.
What does a means test measure?
The means test checks to see whether your family’s income is below your state’s median income level. Technically the test looks backward 6 months, but if there are important factors that should be taken into consideration (such as a job loss) the test can consider that as well. Assuming you pass the means test then you will be allowed to file for Chapter 7 bankruptcy protection. To give some kind of context, in 2013 all but 12% of all debtors who took the means test passed it.
What happens if you don’t qualify?
What if you’re in the group who doesn’t pass the means test the first time around? If you don’t pass initially, you can then move on to a second phase. During this stage of the process you gather documents to try and document your total income and expenditures. The goal is to show that your disposable income is low enough that you should still be allowed to qualify for a Chapter 7 bankruptcy. This can be quite involved and will require lots of detailed financial support, but it can be done if it is important for you to try and get a Chapter 7 bankruptcy.
If this second approach fails you aren’t without options so don’t give up hope. Those who don’t pass the means test can simply file for a Chapter 13 bankruptcy. Your debts can still be restructured and paid off, it will just be spread out over a longer period of time.
If you are contemplating bankruptcy in the Charlotte area, please call the skilled lawyers at Arnold & Smith, PLLC find additional resources here. As professionals who are experienced at handling all kinds of bankruptcy matters, our attorneys will provide you with legally sound advice for your particular situation.
About the Author
Kyle Frost joined Arnold & Smith, PLLC in 2013 where he focuses his practice on all aspects of civil litigation and bankruptcy, including: Chapter 7, Chapter 11, Chapter 13, home loan modifications and landlord-tenant issues.
Born and raised in upstate New York, Mr. Frost attended the University at Albany on a Presidential Scholarship, graduating magna cum laude with a double major in Political Science and Sociology. He went on to attended Wake Forest University School of Law in Winston Salem, North Carolina.
Following college, Mr. Frost spent over a year teaching English in South Korea. He worked in a private school in Seoul developing curriculum, English programs, and educating both children and adults that were interested in learning a new language.
In his spare time, Mr. Frost enjoys homebrewing, fishing, and travelling.
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