Everybody has bills. Perhaps you must be late on a payment or miss one entirely. It isn’t ideal for your credit score, but in the present condition of America’s economy, lots of people need to “rob Peter to pay Paul.” If this really is you, you most likely don’t need to think Bankruptcy, not just yet. But in case you are drowning with debt: charge cards, medical bills, payday cash advances, other unsecured debts, etc., and just can’t seem to keep your head above water each month, Chapter 7 bankruptcy may be an option for you.
Chapter 7 bankruptcy is often referred to as “Liquidation”. This might sound confusing, but think of it this way: ever heard the phrase “cash flow”? Cash can flow from person to person easily, exactly like water flows down a river. In a Chapter 7 Bankruptcy, your bankruptcy trustee will turn certain kinds of your property into cash (or “liquidate”), and that cash will likely then flow to your creditors to pay off your debts. So that you can qualify for Chapter 7 bankruptcy, you must pass a means test.
The bankruptcy begins once you (and your attorney) file for bankruptcy with the court. You are no longer in bankruptcy whenever you receive a discharge. In a great many Chapter 7 cases, all of the debtor’s property is exempt, so the trustee may have no assets to liquidate and disperse to creditors. Cases where there are no assets to distribute to creditors are closed pretty quickly, sometimes within a few months. Even though you have received a discharge, however, you case with the Court will continue to be open until the judge enters and order closing the case. A copy of the order closing your case is going to be sent to you by the Court. Before filing for Chapter 7 bankruptcy, you will have to qualify by way of a Chapter 7 means test. Sounds scary, but know this: since the test became part of Bankruptcy law in 2005, greater than 96% of potential Chapter 7 filers still qualify. The other good news is even though you don’t qualify for a Chapter 7 filing, you may still qualify to file under Chapter 13. We will talk more about Chapter 13 Bankruptcy in a future article.
The Means Test has two steps:
Step 1: Median Income
Your monthly income is compared to the median income for a Texas family the same size as yours. “Median” is yet another method of saying “middle,” such as the median in the middle of a highway. If all of the families in Texas which are the same size as you were lined up by how much money each family makes per month, the median monthly income would be what the family in the middle of the line makes. If you make the same or less money than that family in the middle of the line, you qualify for Chapter 7 bankruptcy – no Step 2 for you. If make greater than the family in the middle of the line, you have to move on to Step 2 of the test.
Step 2: Calculating disposable income
If your disposable income over the next five years is:
- Less than $6,000 ($100/month) – You Pass
- Greater than $6,000 but less than $10,000 – You May Have Passed, (depending upon your allowed expenses)
- Greater than $10,000 – Sorry!