If you are considering filing for bankruptcy, you typically have a choice between filing for Chapter 7 bankruptcy or Chapter 13 bankruptcy.
With Chapter 7 bankruptcy, most of your property becomes part of your bankruptcy estate. Any property that is not able to be exempted may be sold to pay your debts. Chapter 7 is often the best option for consumer debtors, however those above a certain income threshold may not be eligible for chapter 7.
With Chapter 13 bankruptcy, no assets are sold by a trustee. The Debtor instead agrees to complete a court-mandated repayment plan. Payments are made to a trustee over a period of 3-5 years. The trustee then distributes the payments to creditors.
The key is the disposable income for the debtor’s household, as determined by a means test. If a debtor’s disposable income is above a certain level, they are generally unable to qualify for chapter 7.
Median household income
To make sure you don’t have enough income to warrant Chapter 13 bankruptcy, the first hurdle is to determine your median household income. If it is lower than what the state has deemed an average median income, then you do not have to complete the full means test and can file for Chapter 7.
The means test
The means test is a calculation that starts with your gross household income, and then lets you deduct some actual and some standard allowances for things like housing, taxes, insurance, transportation, food, clothing, and medical expenses. At the end of the test, a number is produced that is the debtor’s “disposable income.”
If the disposable income is below a certain threshold, the debtor passes and is eligible for relief under chapter 7. If not, it calculated what amount must be paid to unsecured creditors in a chapter 13.
To determine what your best options are based on your income and debt situation, consult with a bankruptcy expert like those at Giddens & Gatton Law, P.C.