Many people find themselves in a situation where their personal debts have become unmanageable, and they begin to consider filing bankruptcy and making a fresh start. Several areas of bankruptcy law changed recently, and it is helpful to understand some of the basics before making a decision on which type of bankruptcy may work best for you.
The first question one must ask when considering bankruptcy is whether or not you can qualify for Chapter 7, which allows you to erase all debts, or if you must file Chapter 13 and repay a portion of the debt with a payment plan. The answer to this question depends on both the debtor’s income and current monthly expenses and is determined by a two-part analysis as a threshold for qualification.
The Income Test
Although the bankruptcy laws are federal statutes, the income test uses your state median income rather than a national median. If you live in Florida, the Florida median income will be used in the formula, which measures your pre-tax household income for the six months prior to filing for bankruptcy. Using the current median, a single person living in Florida that made less than $3493 per month the previous six months, or a total of $20,958, would pass the income test to qualify for Chapter 7.
But the test does not stop with only the debtor, as it also requires that you include the income of other members of the household in making the determination. For example, a couple living together are allowed $4313 per month in income, while a family of four would be allowed $5438 and still qualify. Looking at those figures, if your household income is below the median then the analysis is complete, as you will qualify and can file Chapter 7 bankruptcy. The median is adjusted each year, and should be checked prior to filing.
The Means Test
If your income is higher than the state median, and if more than 50% of your debt is consumer debt, then you have another hurdle in front of you to show that you need the complete protection that Chapter 7 provides. Simply, the bankruptcy law is designed to make sure that anyone who files Chapter 7 is financially unable to repay any portion of their debt, and that depends on the ratio between monthly personal income and allowable living expenses. In other words, if you have the means to make payments on your debts, you may have to file chapter 13, but there are specific criteria used to determine that ability.
Even if your income exceeds the median, you may still be able to qualify if you have high monthly expenses, such as a mortgage, taxes, childcare and medical expenses. Many high-income debtors are able to qualify for Chapter 7 if they can show that their monthly expenses are also significant enough that it would be unfeasible to satisfy a Chapter 13 payment plan.
As word of caution, you should be aware that you cannot escape the income test by quitting your job, as your income is determined by a formula that includes the past six months. However, the bankruptcy trustee does have some discretion if there are extraordinary circumstances such as major medical expenses or recent unemployment, areas that you can discuss with your legal counsel.
After you have evaluated whether you qualify for Chapter 7 bankruptcy protection, it is time to contact a qualified and experienced bankruptcy attorney to assist you with your filings and hearings required by the court. At the Law Firm Of Joel M. Aresty, PA, we are able to guide you in the process that will lead you to be free of your debts in 3-6 months time.