Chapter 7 bankruptcy offers debtors the opportunity to have most of their unsecured debts discharged, giving them a fresh financial start. However, there are a number of rules in place to prevent people from taking advantage of the system, including the implementation of a means test to determine one’s eligibility for filing for personal bankruptcy in Montgomery County, TX under Chapter 7.
Your ability to pass the means test hinges on your having little or no disposable income. The test is simple: it compares the average amount of money you make in a given month over the six months prior to your bankruptcy versus the median household income for a similar household in your state. If your income falls below the median, you automatically qualify for Chapter 7.
Keep in mind that this median income figure will vary from state to state—in some states it is higher, while in other states it is lower. What the bankruptcy courts basically want to see through the means test is that the amount of debt you have versus the amount of income you have has put you into an unmanageable situation, and that there is no way you can reorganize your debts under a repayment plan to pay off some of your creditors.
What happens if you don’t pass the means test?
If your income is above the state’s median household income, however, you may be wondering what steps you should take from there. Just because your income is above the median does not necessarily mean you are ineligible for filing for Chapter 7 bankruptcy, but it does make the process a bit more challenging.
If your income is above the median, your first step should be to complete the entire means test form, rather than just hoping for the automatic qualification. You must be truthful when providing information about your actual expenses. If deducting all your allowable expenses from your income results in your having little to no disposable income, you’ll still be able to file for Chapter 7 bankruptcy. However, if your expenses are less than your net income and you have disposable income, you will likely not be able to file for Chapter 7 bankruptcy.
Your next best option, then, is to file for bankruptcy under Chapter 13. Chapter 13 bankruptcy is designed for people with higher levels of disposable income who have the ability to restructure their debts into a repayment plan, allowing them to pay off most of their creditors over the course of three to five years. This type of bankruptcy also carries less risk in that it does not require you to liquidate certain assets to pay off your creditors. While you will not get the full discharge of unsecured debts that comes with Chapter 7 bankruptcy, it does help you relieve some of the burden of your debts.
For more information about your options if you do not qualify for Chapter 7 bankruptcy, contact an experienced attorney practicing in the area of personal bankruptcy in Montgomery County, TX.