Qualifying to Permanently Discharge Debt under Chapter 7
In the revisions to the federal bankruptcy laws in 2005, Congress changed the eligibility of individuals for the permanent discharge of debts under Chapter 7. Prior to filing any kind of bankruptcy you must take a credit counseling course. This course can be taken online, over the phone, or in person. In addition you must take a debt management course after you have filed your case, but before you receive a discharge of your debts. To be eligible for a Chapter 7 discharge you must also demonstrate that your bankruptcy filing is not an abuse of the bankruptcy process. For most people this is determined by the “Means Test.”
What Are the Requirements of the Means Test?
Under the new law, you must demonstrate that you qualify to rid yourself permanently of such debt, submitting to a “Means Test,” a mathematical test designed to determine whether you ‘make too much money’ to file a Chapter 7 bankruptcy.
The formula for determining whether you can file for bankruptcy protection under Chapter 13 starts with a calculation of your “disposable income.” The bankruptcy court will take the average of your income over the six months prior to your filing. If your average monthly income is less than the median income for a household of the same size in your state, you qualify and can file a Chapter 7 petition. You won’t need to look at any other components of the test. Income used for purposes of the means test can include wages, interest or dividends, child or spousal support, rental property income, unemployment compensation, and workers’ compensation. Some types of income, such as certain social security payments, are not counted in the Means Test as income.
If you have more income than the median income for a household of your size in your state, your attorney must next calculate how much “disposable income” you have. The Means Test takes your income and deducts certain allowable expenses, as determined by the Internal Revenue Service and by some of your actual expenses. The Means Test will then look at how much “disposable income” you have, calculated over a five year period. If this number is more than $118.00 per month, then you may be required to file a Chapter 13 and pay a portion of your debts to your creditors. In a Chapter 13 your debts will be forgiven just like in a Chapter 7, but a Chapter 13 requires you to make some payments on account of your debts.
Contact John Hargrave and Associates
We have provided comprehensive counsel to individuals in and around Barrington, New Jersey, since 1977. To schedule a free initial consultation, contact our office by e-mail or call us at 856-759-6022 (toll free at 866-662-3191).