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Chapter 7 bankruptcy allows you to get rid of most or all of your unsecured debt without having to give up any of your assets, in most cases. This is because the bankruptcy laws in California allow for generous exemptions that keep your property out of your bankruptcy case.
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Chapter 13 bankruptcy allows you to reorganize on your finances while keeping your creditors and their legal attacks at bay. It also allows you to catch up on any arrearages on collateral (such as a house or car) that you intend to keep.
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What is the Means Test?
As bankruptcy becomes more common and grabs more headlines, people often become fairly familiar with basic bankruptcy law and concepts. One such bankruptcy concept that has been highlighted by the media and thus piques consumers’ interests is the Means Test. This test is used to see if a debtor is eligible for a Chapter 7 bankruptcy. For those debtors with primarily consumer debts, they must disclose their financial information via this Means Test. It evaluates their potential ability to pay creditors a minimum amount over five years. If the debtor has that ability, then there is a presumption of abuse if the person files a Chapter 7 bankruptcy. If, over the five year period, the debtor would be able to contribute the lesser of $11,725 to creditors, or pay off 25% of their non priority unsecured debt, then they will not pass the test. In simpler terms, if someone can contribute $117 to $195 a month over five years, then they will fail the test and a presumption of abuse will arise if they file a Chapter 7. This simply means that a Chapter 7 bankruptcy may not fit your situation.
To figure out how much they would potentially be able to give to creditors over five years, the debtor’s “current monthly income” is calculated. This is done by averaging the past six months of gross income prior to filing. This is then reduced by allowed expenses to determine if there is any monthly surplus amount that could be given to creditors. However, as your “current monthly income” is really the average of what you have made in the past six months, large increases or decreases in your income over this period can seriously impact your Means Test outcome. Large bonuses, overtime, or commissions received in the past six months can artificially make it appear that someone has a lot of disposable income, whereas a hard few months for a person who has a large salary can show that they have nothing to give to creditors. This aspect makes planning the timing of filing bankruptcy very important, and an Ontario bankruptcy lawyer should always be consulted.
However, even if the presumption of abuse is triggered by the Means Test, it may be rebutted by showing “special circumstances” that justify additional expenses or income adjustments that would actually allow the debtor to pass the test. Furthermore, the Means Test only applies to those with primarily consumer debts, which are those for personal, family, and household uses (this also includes the mortgages on your principal residence). Thus, if most of your debts are not consumer debts, such as business debt or tax liabilities, you are not subject to the Means Test and may file a Chapter 7 without a presumption of abuse arising. To determine if you are subject to the Means Test, the advice of an Ontario bankruptcy lawyer should be sought.
The Means Test is the gateway for Chapter 7 bankruptcy, and it is important to plan meticulously before filing in order to pass it. It is important to consult experienced bankruptcy lawyers Ontario who are familiar with the mechanics of the Means Test and how to plan filing such that a debtor will pass it. Experienced bankruptcy lawyer Ontario, such as those at Wadhwani & Shanfeld, APLC can help clients navigate this tricky area of law, and help accomplish their goals.