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Bankruptcy May Be Your Option

What is the Chapter 7 means test, and how does it affect me?

As discussed in a previous post, there are two main types of personal bankruptcy that can be filed by an individual debtor, Chapter 7 and Chapter 13. These two options have some significant differences.

In Chapter 7, the debtor claims that he or she does not have enough income to make any payments toward unsecured debts. Instead, the bankruptcy trustee analyzes the debtor's assets and liquidates any non-exempt assets to make partial payments to creditors. However, the exemptions available under the bankruptcy code are generous and most debtors do not have any non-exempt assets for the trustee to liquidate. Therefore, debtors are able to simply wipe out their debts without paying anything at all to most creditors.

For those with no non-exempt assets, this is a huge advantage to filing Chapter 7. Before 2005 almost anyone could file for Chapter 7 relief, and the question of eligibility was left to the discretion of the local bankruptcy court. But when Congress passed the Bankruptcy Protection Act of 2005, the effect was to narrow the qualification rules for individuals filing Chapter 7.

This is where the means test comes in. Essentially, the means test is a determination of the monthly income of the debtor or joint debtors over the six month period immediately prior to filing, compared to the median income for the state where the the petition is being filed.

The median income for an Oklahoma family will depend on the number of residents in the household. If the debtor's income is above the median income, the bankruptcy court may require filing under Chapter 13 instead.

Even if the debtor's income appears too high at first glance, there may be exceptions that apply which will still allow filing under Chapter 7. Some of those special circumstances include having mostly debts that were obtained from operating a business, debts that were accumulated during active duty military service, or unusually high legitimate and necessary expenses that can be proven to the court.

The bankruptcy law is extremely complex, but an experienced attorney may be able to analyze your individual situation and advise you as to the best way to proceed through the process. 

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