Chapter 7 bankruptcy provides significant relief for people who owe substantial sums in consumer debt. However, it is only intended to help individuals who truly cannot pay off their debts. In order to file for Chapter 7, you need to pass what is called the “means test.” This uses a formula that keeps people who have sufficient income to pay their debts from filing for this type of bankruptcy. A knowledgeable bankruptcy attorney can evaluate whether you are eligible to file for Chapter 7 in Alabama and review alternative solutions with you.
The higher your disposable income, the less likely you will be eligible to file for Chapter 7 bankruptcy. The first part of the means test consists of determining whether your income is more or less than the median income for a household of your size in Alabama. If you earn less than the median income, you are eligible to file for Chapter 7 bankruptcy. Figuring out which household size to use can be difficult for a layperson because courts do not all agree on how to count the number of people in your household. Some courts consider a household to include everyone in a house, while others only count those people in a house who are financially dependent on the person filing for bankruptcy. Generally, a stranger renting a room in your house will not count as a member of the household, while an aunt who shares your resources and contributes towards groceries and rent would count.
If you earn more than the median income for your household size, you need to deduct allowed monthly expenses from your monthly income to determine your disposable income. The allowed monthly expenses to be subtracted from your income vary, but they always include basic necessities. For some expenses, the amount allowed is based upon an amount that the IRS allows in its repayment plans rather than the amount you actually spend. This can make it appear that you have more “disposable” income than you actually have. The goal of the formula is to find out whether you have enough after paying certain necessary bills to repay at least some amount of your unsecured debts, which are debts that are not secured by property. In other words, a creditor cannot repossess property and sell it if you do not repay the debt. Examples of unsecured debt include most credit card debt and medical debt.
Qualifying for the means test does not necessarily mean you should file for Chapter 7 bankruptcy. For some people, it may be more appropriate to file for Chapter 13 bankruptcy, which allows you to repay at least some of the debts over three to five years. This is a better choice, for example, if you need to cure a default on your mortgage payments to avoid foreclosure, or if you want to use various tools to keep certain property that you have not finished paying for, such as a vehicle. Since people are limited in how much property they can protect in a Chapter 7, a Chapter 13 allows people to keep property which goes over those limits by paying the amount they went over to their creditors through a 3-5 year payment plan.
There are many complications that must be resolved when applying the means test to your particular circumstances. An experienced bankruptcy lawyer in the Montgomery area can guide you through the process of determining which type of bankruptcy would fit your circumstances and also suggest other potential solutions to your financial troubles. Grainger Legal Services represents individuals in South-Central Alabama from our offices located in Montgomery, Prattville, and Troy. Call us at (334) 260-0500 or contact us online to schedule a free consultation.