Bankruptcy, Debt Consolidation :: Is Chapter 7 Still Available To A Debtor?

Is Chapter 7 Still Available To A Debtor?

The Bankruptcy Code was significantly amended with a general effective date of October 17, 2005. It was Congress' intent to make those who could afford to pay back a portion of their debt ineligible to eliminate their debt in a Chapter 7 bankruptcy. This intent is being carried out by the advent of the "means test". This test can be invoked by any creditor, the trustee, the court or the U.S. Trustee.

To determine if a debtor can afford to pay back a portion of his debts, you must commence a complicated mathematical equation.

You must first take the debtor's current monthly income (CMI). If the debtor's CMI is less than the state median income, the debtor can file a Chapter 7 and no further calculations are required. For information on state median incomes, visit http://www.census.gov/hhes/income/4person.html.

Current Monthly Income is not determined by the income made during the current or previous month. I know that seems like a contradiction, but follow along. The actual (CMI) is the average monthly income received by the debtor and the debtor's spouse if the debtor is married during the six month period prior to the petition date. This effectively prevents a debtor who is out of work for one month from claiming that he cannot pay back his debt. He may in fact have a high (CMI) if his income from the prior five months was great. So you can see that Congress has tightened the loophole. Under the old law, an out of work debtor would be scrutinized only as of the date of filing. Under the new law, a larger snapshot is taken to determine if the debtor has the means to pay back his debts.

If the debtor's CMI is greater then the state median income, then you must continue to calculate in accordance with the means test formula to determine if the debtor can file a Chapter 7 or not.

If the debtor's CMI, less allowable deductions is less than $100.00 per month, then the debtor can file for bankruptcy under Chapter 7. If the debtor's CMI, less allowable deductions is greater than $166.00, then the debtor must file a Chapter 13 bankruptcy.

If the debtor's CMI, less allowable deductions is between $100.00 and $166.00, then he may need to file under Chapter 13 depending upon the amount of unsecured debt and the percentage that could be repaid using the debtor's disposable income over a five year period. If the disposable income amount is not enough to pay 25% to unsecured creditors over a five year period, the debtor can file a Chapter 7. Thus, the amount of debt is a factor in determining whether the debtor must file a Chapter 13. The greater the debt, the more likely that the debtor will be able to file a Chapter 7. As you can see, the math calculations are very complex.

Additionally, you cannot utilize the debtor's expenses when calculating disposable income. Disposable income is now based upon expense standards provided by the Internal Revenue Service as they relate to the local area in which the debtor lives.

If the debtor has disposable income of $167.00 per month, he will always fail the means test, regardless of how much unsecured debt the debtor may have. Additionally, the Chapter 13 plan will have to be for five years, not three years.

The presumption of abuse or failing the means test can always be rebutted. The debtor will have to demonstrate special circumstances that would decrease the income or increase the expenses, so that the debtor actually qualifies for Chapter 7. For example, the debtor may have constant medical expenses which are beyond the limits of IRS guidelines. That debtor may be able to rebut the presumption of abuse under the new means test. Please contact an experienced bankruptcy attorney to determine the likelihood that you will qualify for Chapter 7 bankruptcy relief.

How Often Can an Individual File for Chapter 7 Bankkruptcy?

Under the current law, a debtor can only receive a discharge once every eight years. This is an extension from the old law which permitted a discharge once every six years.

By: David Siegel

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David M. Siegel is the author of Chapter 7 Success: The Complete Guide to Surviving Personal Bankruptcy. He is a member of the American Bankruptcy Institute and currently practices bankruptcy law in Chicago and its surrounding suburbs. Additional information is available at www.chapter7success.com .