Of all the various chapters for filing bankruptcy in the US, chapters 7 and 13 are the most popular. In fact 85% of all filings are under chapter 7, probably as this is perceived as the “best” type of bankruptcy, leaving the debtor free from any debt on discharge, unlike chapter 13 where debts have to be repaid under a repayment plan.
This is despite the fact that in chapter 7 all assets are sold to repay as much money as possible.
This is because that although the debtor loses virtually everything, the creditor often recovers very little.
Often this is just a sad reality of life, but until a few years ago chapter 7 could be used by the unscrupulous simply to get rid of debt that they could in fact afford to repay, albeit with a little rearranging of their debts.
Therefore, 2005 saw the introduction of a compulsory means test for individuals seeking chapter 7 bankruptcy, failure of which would automatically push them into a chapter 13 filing, which is a 3-5 year repayment plan.
This was introduced to make certain that creditors got as much of their money as possible by ensuring that those who could pay did pay.
If this works out at less than the median income for a household of the same size in the same state you immediately pass the means test and qualify for chapter 7.
If you fail this part it gets a little complicated, as the court then decides if you are in a position to pay off at least some of your unsecured debt.
This can vary from state to state, as they all have different ideas on what reasonable living expenses are. In other words, you may find that you have very little left to live on, but are forced into a chapter 13 bankruptcy, where debt is repaid over 3-5 years.
The problem here is that different states have different rules as to what are the allowed amounts for day to day living expenses. However, if your “disposable income” is more than a certain amount, you fail the means test and are prevented from filing for chapter 7.
Bankruptcy is a traumatic step, despite what other people may say to you. It can destroy your financial postion as your credit rating drops. Although chapter 7 is the most popular form of bankruptcy, it may be worth looking at chapter 13 bankruptcy law. If you would like further free information and advice, visit www.chapter13bankruptcylaw.net.