The government recently altered the law surrounding Chapter 7 bankruptcies by implementing a new “means test” to check a person’s eligibility to file for Chapter 7 bankruptcy. The government designed the test to prevent high-income earners from obtaining a Chapter 7 discharge if they can pay off a portion of their debts using a Chapter 13 repayment plan instead.
Fortunately the means test does not set an unreachable bar. Many people will still qualify for Chapter 7 bankruptcies. Even those with high monthly incomes might qualify if they have significant expenses like a mortgage payment.
How Does the Chapter 7 Means Test Work in Lake County Bankruptcy?
The government designed the means test to curb the use of Chapter 7 bankruptcies and funnel more high income earners into Chapter 13 plans. To determine if someone qualifies for Chapter 7, the test starts with a person’s current monthly income. It then uses a two-step process of comparing that income to the state’s median, as well as to the person’s expenses, and determines whether they have enough money to fund a Chapter 13 repayment plan.
The test’s first step compares the potential filer’s income to the state’s median income. If the person’s income falls below the state median, then they automatically qualify for Chapter 7 and can avoid the rest of the test. If the person’s income is above median, then they move on to the second step.
This second step attempts to measure a person’s disposable income by subtracting their allowable expenses from their monthly income. If a person’s disposable income exceeds a certain amount, then the law requires them to use a Chapter 13 plan to repay at least part of their debts.
The exact numbers for both steps of the means test vary depending on where the filer lives and the size of their family. Fortunately, people considering bankruptcy can save themselves the hassle of looking up these numbers through the use of our online means test calculator. This calculator can provide anonymous answers to whether a person qualifies for Chapter 7 bankruptcy.
Lake County Bankruptcy – What Happens If You Pass the Chapter 7 Means Test?
Passing the Chapter 7 means test will allow a person to file for Chapter 7 bankruptcy. However, just because the law allows it does not necessarily make it the right decision. A person should only file for bankruptcy after getting a full understanding of its effects and weighing all of the options available to them. In situations like this, consultations with an attorney can help someone best structure their financial future.
Lake County Bankruptcy – If You Do Not Pass the Chapter 7 Means Test
The law limits those who do not pass the means test to filing for Chapter 13 bankruptcy. This sort of bankruptcy requires a person to pay off a portion of their debts over a five year period, rather than simply going through liquidation under Chapter 7. However, that does not necessarily make Chapter 13 a worse option than Chapter 7. Reorganization plans under Chapter 13 can solve some problems that Chapter 7 cannot. For instance, those who file Chapter 13 while facing the threat of foreclosure may be able to work out a way to keep their home under their repayment plan.
For help with bankruptcy questions and to discuss the means test, please contact Newland & Newland today. We provide support to clients in Lake County, McHenry County, Cook County, DuPage County, Crystal Lake, Arlington Heights, Barrington, Palatine, Rolling Meadows and throughout Northern Illinois.