Planning to file bankruptcy is the most important part of the bankruptcy process. Determining whether an individual consumer qualifies for chapter 7 bankruptcy and how one pursues a chapter 13 bankruptcy has become more difficult since 2005. 2005 was a big year for bankruptcy. This is the year the pendulum swung to be more creditor friendly. In 2005, the bankruptcy code was overhauled and thus was created the infamous "means test." The "means test" formula is also used to determine whether that same individual consumer should be repaying debt over a three year or five year period in a chapter 13 bankruptcy.
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The "means test" is a wacky formula that combines the average income of the individual consumer over the previous six months prior to the proposed filing and subtracts from that arbitrary IRS created allowances for some basic living expenses plus some actual living expenses. It is almost impossible for an individual consumer to solve the "means test" formula without a good bankruptcy lawyer.
The Congressional goal (though inept as it is) in creating the "means test" is to determine if a consumer (this term is specifically defined in the bankruptcy code) is abusing the bankruptcy code by filing for bankruptcy protection under chapter 7 or chapter 13 of the bankruptcy code. If one does not qualify to file a chapter 7 bankruptcy, it means that Congress has decided for you that you can afford to pay all or some of your debts, irrespective of circumstances. Note that there is no means test in a chapter 11 bankruptcy. This, believe it or not, is a major benefit of chapter 11. In other words, there are situations where I recommend filing a chapter 11 bankruptcy rather than the more streamlined chapter 13... specifically because of the "means test." However, there are some major drawbacks to a chapter 11 as well. That post is for another day.
The "means test" is filled with so many inconsistencies that certain aspects of it have been brought before the U.S. Supreme Court for clarification. Guess what? Not much clarification.
Oh, by the way, Congress never asked any bankruptcy lawyers or judges about how to create this "means test." They did however, ask the banking and creditors lobby for help.
Many cases get dismissed for failure to competently calculate the "means test." So, the moral of the story is... seek a good competent bankruptcy lawyer (not a paralegal) to help plan through the "means test."
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