The Dangers of Waiting to File for Bankruptcy

The Bankruptcy Means Test for Chapter 7 Filings

October 19th, 2015 by Bunch & Brock

The Dangers of Waiting to File for Bankruptcy

If you have debt that you don’t know how to turn around, you may be able to get relief through bankruptcy. The only legal way to have your debts forgiven, bankruptcy is a federal process by which consumers can eliminate overwhelming financial burden and protect themselves from aggressive creditors. Filing under Chapter 7 of the United States Bankruptcy Code is the most common form of personal bankruptcy, and while it is generous in providing a fresh start, not everyone is eligible.

Although many discussions concern whether Chapter 7 bankruptcy is the right choice for your situation, it’s important to find out if it’s even an option. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) introduced the concept of the “means test,” which is designed to determine whether a person has the ability to pay off their debts and is therefore better suited to seek a Chapter 13 bankruptcy instead of a Chapter 7. The biggest difference is that Chapter 7 focuses on liquidating damages, while Chapter 13 focuses on reorganizing debt into a more manageable plan. If a Chapter 7 petition is filed and later there is a determination that the debtor is not qualified, the court can either dismiss the petition or convert it into a Chapter 13 petition.

To figure out if you are eligible to file under Chapter 7, the first step is to compare your average household income for the past six calendar months to the median Kentucky income for a household of your size. The current average monthly income refers to all taxable and non-taxable income from all sources, unless otherwise exempted, including those of the non-filing spouse (if married). Once you determine your average monthly income, you multiply that by 12 to determine your annual income for comparison. In 2015, the median Kentucky income is $42,000 for one earner, $49,139 for two people, $58,552 for three people, and $69,794 for a family of four. If your income is below the median, you qualify for Chapter 7. If it is above the median, there is a second step that must be taken to determine eligibility. Note that if you are over the median income limit and your income has declined over the last six months, then waiting one or more months might bring your income under the median level.

The second phase of the bankruptcy means test is complex, with many variables. Essentially, it must be determined whether you have enough disposable income after deducting your allowable monthly expenses (such as food, clothing, shelter, transportation, child care, etc.) to pay your unsecured debts (such as credit card debts or medical bills), either in full or in part. These calculations involve the IRS’s National Standards and Local Standards charts and are intended to determine how much you can afford to pay your unsecured creditors over the next five years.

If you are contemplating of filing bankruptcy or other alternatives, it is advisable to seek the counsel of a bankruptcy lawyer to guide you through these confusing computations. The KY bankruptcy attorneys at Bunch & Brock have more than 35 years of experience helping debtors determine the best course of action for their situation. To get started, or if you have any questions about this topic, call us at 859-254-5522. You can also reach us by filling out this online form.