Medical debts, unpaid credit card balances, and mortgage payments can get out of control and leave you looking for a way out. If you are depending on a bankruptcy to discharge your debts, you will need to qualify under the Chapter 7 means test. But even if you fail, a Chapter 13 payment plan may still be worth considering.
Ever since the Bankruptcy Reform Act of 2005, federal law has limited who is eligible to file a Chapter 7 bankruptcy based on income. The question the government asks is whether you have the means to pay your debts. It’s called the Chapter 7 means test, and it looks at your financial situation over the last six months before you file your petition for bankruptcy.
Gather up your income from all sources: wages, disability payments, child support payments, even your freelance gig. Now compare that income to the median household income for a family your size in your county. This number can vary greatly. For example, in 2019, the median income for all families in Oakland County was $79,698, but in Detroit it was only $30,894. If your income is below the median income, you are presumptively eligible to file a Chapter 7 bankruptcy. If not, you will need to move on to Step 2.
The IRS allows for a variety of deductions from your income that can shift you below the median income level. Work with your bankruptcy attorney to subtract allowances for:
You will fail the means test if, after deducting all the allowable expenses, you still have approximately $100 per month to pay your creditors. While there are some exceptions (such as business debts or military personnel), if you file a Chapter 7 petition and you fail the bankruptcy means test, the petition will likely be dismissed without discharging your debts.
Even if you fail the Chapter 7 means test, you may still be eligible for bankruptcy relief. A Chapter 13 bankruptcy may be worth it if your goal is to reduce your monthly payment and stop ever-growing interest and penalties.
Chapter 13 has a means test, too, but it works in the opposite direction. To be eligible for a Chapter 13 payment plan, you need to demonstrate that you make enough money to pay all your allowed expenses and secured debts, and still have some money left over to pay your creditors. Over the course of the next 3 to 5 years, you will make one payment to the Bankruptcy Trustee, who will distribute that payment to your creditors according to the payment plan. The amount of your Chapter 13 payment will be based on your disposable income -- the difference between your income and your allowable expenses under the means test.
A Chapter 13 bankruptcy may take longer to resolve than a Chapter 7, but that extra time and effort is worth it. Every bankruptcy -- Chapter 7 or Chapter 13 -- includes an automatic stay. This stay protects you from collections efforts by your creditors and gives you time to pay off your debts.
Your Chapter 13 payment plan includes all your debt obligations -- secured or unsecured -- and divides up your monthly payments between all your creditors. If you owe more than you can reasonably pay during the repayment period, the balances of most unsecured debts are discharged once you successfully complete the payment plan.
In addition, unlike a Chapter 7 bankruptcy, a Chapter 13 bankruptcy allows you to keep most of your property. If you have substantial equity in your home, or if your family depends on having two vehicles, a Chapter 13 bankruptcy may be the better option.
Don’t let anyone tell you that you make too much money to file for bankruptcy. Even if you fail the Chapter 7 bankruptcy means test, there are still options available to you that will help you reduce your payments, pay down your balances, and get your family out of debt.
At John A. Steinberger & Associates, P.C., we are a full-service bankruptcy law firm in Southeast MI. We help debtors and families in Southfield, throughout Metro Detroit, and in the surrounding communities qualify for Chapter 7 bankruptcies, and file Chapter 13 payment plans if they do not. If you think either form of bankruptcy might be the best financial decision for you, call us toll-free at (866) 690-2140 or contact us online to schedule a free initial consultation.