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If you become bankrupt, it is very easy to fall into the trap of believing that your financial future is bleak. What is important is that you look carefully at your options, and make careful decisions about how you are going to deal with the problem. Meridian Debt Relief can offer advice and support through bankruptcy.
Under Chapter 13, the bankrupted have to hand over any disposable income to set against the debt they have incurred. Recent developments have made the situation more pressured, with the law now asking that declared bankrupts calculate their disposable income against a means tested state average expenses. If your income is higher than these median figures, you can face a situation where your costs are actually far higher, and you end up paying more. Even more damaging is the rule that the expenses must be taken from the average income of the six months before filing for bankruptcy.
Since you generally tend to have more money before you go bankrupt, the eventual payout can be larger than you can sustain. Perhaps that is why when chapter 13 filings fail, it isn't really all that surprising. Property must be valued at replacement cost. In regards to property and belongings, the old Chapter 7 rules state that you could value your property against what you could sell them for at an auction or "fire sale". The resulting low valuation means most of the property a bankrupted owned fell under the exempt property categories used by most states. The new rules under Chapter 13 have done away with this. Instead, they ask that bankrupted value their property against retail prices, taking into account depreciation. This automatically confers value on property, and means that the property may be taken from the bankrupted and used against the debt.
Restricted Eligibility for Chapter 7
Chapter 7 used to be chosen by many bankrupts due to its leniency. Now the new law prohibits many people with higher incomes from going to Chapter 7. If you want to file for Chapter 7, you have to first measure your income against the median for your state. But don't forget the income you are measuring is the average income during the six months before you went bankrupt. This logic means that because you were earning a proper income before you became bankrupt, your calculated salary will be much higher than the median.
How High is Your Income? Once you have calculated your income, you can then test it against the median for the state, and if your income is equal to or less than that median, you can file under Chapter 7. If it isn't, which of course it might well not be, you have to take a means test if you want to file under Chapter 7.
Once you've calculated your income, compare it to the median income for your state. You can find median income tables, by state and family size, at the website of the United States Trustee, http://www.usdoj.gov/ust/. Then click on Means Testing Information. If your income is less than or equal to the median, you can file for Chapter 7. If it is more than the median, however, you must pass "the means test" -- another requirement of the new law -- in order to file for Chapter 7.
The Means Test
The purpose of the means test is to figure out whether you have enough disposable income, after subtracting certain allowed expenses and required debt payments, to make payments on a Chapter 13 plan. To find out whether you pass the means test, you start with your "current monthly income," calculated as described above. From that amount, you subtract both of the following:
Note: Requirements Eased for Hurricane Victims
Following Hurricanes Katrina and Rita, the United States Trustee's office announced special enforcement guidelines for debtors affected by natural disasters. These guidelines are an effort to lessen the impact of the new law on filers who may be displaced from their homes and personal papers.
Among other things, these guidelines make the following changes for victims of natural disasters who file for bankruptcy:
Note: Lawyers May Be Harder to Find -- and More Expensive
As you can see, the new law adds some complicated requirements to the field of bankruptcy. This is going to make it more expensive -- and time-consuming -- for lawyers to represent clients in bankruptcy cases, which means attorney fees are going to go up. The new law also imposes some additional requirements on lawyers, chief among them is that the lawyer must personally vouch for the accuracy of all of the information their clients provide them. This means attorneys will have to spend even more time on bankruptcy cases, and charge their clients accordingly. Some experts predict that this combination of new requirements may drive some bankruptcy lawyers out of the field altogether.
Some Chapter 13 Filers Will Have to Live on Less
Under the old rules, people who filed under Chapter 13 had to devote all of their disposable income -- what they had left after paying their actual living expenses -- to their repayment plan. The new law adds a wrinkle to this equation: Although Chapter 13 filers still have to hand over all of their disposable income, they have to calculate their disposable income using allowed expense amounts dictated by the IRS -- not their actual expenses -- if their income is higher than the median in their state (see "Restricted Eligibility for Chapter 7," above). These expenses are often lower than actual costs.
What's worse, these allowed expense amounts must be subtracted not from the filer's actual earnings each month, but from the filer's average income during the six months before filing. This means that debtors may be required to pay a much larger amount of "disposable income" into their plan than they actually have to spare every month -- which, in turn, means that many more Chapter 13 plans will fail.
State Exemptions Aren't Available to Recent State Residents
Under the old bankruptcy law, the personal property debtors were allowed to keep in Chapter 7 bankruptcy was determined by the laws of the state where they lived (as long as they lived there for at least three months). Under the new law, you must live in a state for at least two years prior to filing in order to use that state's exemption laws. Otherwise, you must use the exemptions available in the state where you used to live. Similar rules apply to homestead exemptions, which determine how much equity in a home you can keep when filing for Chapter 7 bankruptcy. However, to use your new state's homestead exemption, you must live there for at least 40 months.
Because exemption amounts vary widely from state to state, these new residency requirements could make a big difference in the amount of property you get to hold on to. For example, if you recently moved from California to Nevada and you have a fairly valuable car, you might want to wait to file for Chapter 7. Once you've been in Nevada for two years, you can claim its $15,000 exemption for motor vehicles. If you have to use California's exemptions, you can keep only $2,300 worth of equity.
Certain allowed expenses, in amounts set by the IRS. Generally, you cannot subtract what you actually spend for things like transportation, food, clothing, and so on; instead, you have to use the limits the IRS imposes, which may be lower than the cost of living in your area.
Monthly payments you will have to make on secured and priority debts. Secured debts are those for which the creditor is entitled to seize property if you don't pay (such as a mortgage or car loan); priority debts are obligations that the law deems to be so important that they are entitled to jump to the head of the repayment line. Typical priority debts include child support, alimony, tax debts, and wages owed to employees.
If your total monthly disposable income after subtracting these amounts is less than $100, you pass the means test, and will be allowed to file for Chapter 7. If your total remaining monthly disposable income is more than $166.66, you have flunked the means test, and will be prohibited from using Chapter 7.
So what about those in the middle? They have to do some more math. If your remaining monthly disposable income is between $100 and $166.66, you must figure out whether what you have left over is enough to pay more than 25% of your unsecured, non priority debts (such as credit card bills, student loans, medical bills, and so on) over a five-year period. If so, you flunk the means test, and Chapter 7 won't be available to you. If not, you pass the means test, and Chapter 7 remains an option.
Credit counseling will not be required
Debtors who cannot provide required documents due to a natural disaster will not face enforcement actions.
Trustees are to consider the income loss, increased expenses, and other effects of a natural disaster as "special circumstances" that may allow a debtor who doesn't otherwise pass the means test to qualify for Chapter 7.
Trustees will provide alternate means for debtors to attend creditors' meetings, if necessary.
For more on these rules, go to the website of the United States Trustee, www.usdoj.gov/ust and click "Enforcement Guidelines for Debtors Affected by Natural Disasters."
Being in debt leaves many people feeling vulnerable. Some institutions take advantage of this. Be cautious, and remember that the process of managing your debt isn't supposed to put you into more debt.
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