Chapter 7 v 13
Everyone qualifies for Bankruptcy.
However, the point of the Bankruptcy laws is to try to get you to pay back your creditors.
To determine if you can just wipe out your debts (Chapter 7) or have to pay back your creditors (Chapter 13) you must pass two tests.
The first is a liquidation test – the government wants to know what would happen if they sold everything you owned and gave the money to your creditors. This may sound scary, but as you will see below, it is not.
First you make a list of everything that you own and what it is all worth. Then government then has a list of things they will never take from you. You take the list and compare it to what you own and use the exemptions to cancel out the value of your stuff.
After going through the list if the value of your stuff is canceled out by the exemption amount then you have no assets and you pass the first part of the test. For most people, the exemptions cancel out everything they own, houses, cars, pensions and they are allowed to keep everything.
On the other hand you have something left that still has value to it after the exemptions, then you have an asset. You then have two choices, let the government have it so they can sell it and give the money to your creditors or keep it but agree to pay your creditors back the same amount of money as if the thing were sold in a Chapter 13 bankruptcy.
The second test is an income test because the government thinks that extra income, over and above your necessary living expenses, is also an asset. It is called the Means Test.
In the Means Test, the government asks how much do you make per year. Now, you might think that is an easy question but, the government considers your yearly income to be the amount of money you received from any source in the past six months doubled. Once you have that number, you compare it to the median income for your household size. If you make less then or equal to the median income, then you pass the Means Test; if you make more than the median income, then initially the government thinks you might have money left to pay your creditors and makes you continue the Means Test.
The government then starts deducting living expenses from the income – some real – some what the government says you should be spending. After making all the deductions you are left with a number that is positive, zero or a negative. If it is zero or negative then you have passed the Means Test.
If it is positive, then you have “failed” the Means Test and the government thinks you have that amount of money left over each month and would expect you to file a Chapter 13 bankruptcy to pay that sum back to your creditors for 5 years.
These tests determine if you can file a Chapter 7 and wipe out your debts or file a Chapter 13 and have to pay something back – either way, if you are up against a wall it is usually your best financial option to get you back on your feet and leave you with a fresh start!
About Gregory Flood
Gregory Flood is a Staten Island Bankruptcy Lawyer with his clients best interests at heart. He has helped thousands of satisfied clients recover from financial problems and get the relief that they need.
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