The changes to bankruptcy law in 2005 may be making it harder for some people to file bankruptcy. A few filers with higher incomes will no longer allowed to use Chapter 7 bankruptcy, but will instead have to repay at least some of their debt under Chapter 13. In addition, the 2005 law requires all debtors to get credit counseling before they can file a bankruptcy case — and additional counseling on budgeting and debt management before their debts can be wiped out.
Here are some of the most important changes in the 2005 bankruptcy law:
Restricted Eligibility for Chapter 7 Bankruptcy
Under the old rules, most filers could choose the type of bankruptcy that seemed best for them — and most chose Chapter 7 bankruptcy (liquidation) over Chapter 13 bankruptcy (repayment). The law passed in 2005 prohibits some filers with higher incomes from using Chapter 7 bankruptcy.
How High is Your Income?
Under the rules enacted in 2005, the first step in figuring out whether you can file for Chapter 7 bankruptcy is to measure your “current monthly income” against the median income for a household of your size in your state. If your income is less than or equal to the median, you can file for Chapter 7 bankruptcy. 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 subtract certain allowed expenses and debt payments from your current monthly income. If the income that’s left over after these calculations is below a certain amount, you can file for Chapter 7.
If you’re looking for an easy way to determine your eligibility under the means test, use our online means test calculator, created by the applicable income and expense standards for your state, county, and region to determine your eligibility.
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