There are many reasons why a person might consider filing for bankruptcy. A medical emergency, personal problem, or employment issue could leave someone with debt that is too much to handle. If you feel that you are unable to manage your debt, bankruptcy might be an option for you.
The United States Bankruptcy Code reflects the fact that debtors have different financial backgrounds. Chapter 7 bankruptcy, for example, is designed for individuals or families without a steady source of income. On the other hand, chapter 13 bankruptcy lets the debtor develop a repayment plan because they earn a consistent wage. The different forms of bankruptcy have different requirements. However, most debtors will have to go through the "means test" in order to show the court that their income is not enough to cover their debts within a reasonable amount of time.
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What is a "Means Test"?
Declaring bankruptcy is a way for individuals and families to have some of their debts absolved. They can only do this, however, after they show the court that their income is not enough to pay off these debts. The United States Bankruptcy Court uses a means test to determine whether or not the applicant qualifies for help.
The first part of the means test compares the debtor's income against the average income for those living in the same state. Bankruptcy claims are federal claims, which means they are heard in federal court. The United States Bankruptcy Code generally applies to debtors across the country, but it takes into account the fact that income and cost of living can vary from state to state. Therefore, they consider the average income of the state where the debtor lives. If they make less than the average, they automatically pass the means test. But if they make more than the average household income for their state, they'll have to move on to the second part of the means test.
If a person's income doesn't automatically qualify them for bankruptcy filing, they must submit a detailed list of their monthly expenses. This includes rent, food, and clothing, but also takes less obvious expenses, such as insurance payments, into account. It is important to be very detailed about these monthly costs because the court will compare this list to your income. If your expenses show that you do not have enough income left over each month to pay off your debt, then you may be allowed to file for bankruptcy.
Problems with the Means Test
Although the means test is designed to give consideration to each debtor's individual situation, it might not always work out that way. When a person files for bankruptcy, they have to report their own income, but they also need to report the income of anyone that lives with them. If their boyfriend, girlfriend, roommate, or adult child earns an income and contributes to household expenses, this information needs to be given to the court.
How does this extra income affect the means test? It depends. The extra income might not push the average household income over the state's average in some cases. But in other cases, it could prompt the bankruptcy court to deny a bankruptcy claim because they believe that there are more people earning income in the house than the debtor originally thought. For example, if a couple wants to file for bankruptcy, they will also have to report the income of any adult children that still live in their home whether or not they pay rent and contribute to paying household costs. This added income might disqualify them from filing for bankruptcy, even though they don't benefit from their child's additional income.
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