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Chapter 7 (Liquidation) & the Means Test

Credit Cards

Chapter 7 bankruptcy typically translates to a liquidation of a debtor’s property as a tradeoff for the discharge of debt. With most of our clients, however, the vast majority lose nothing but a bunch of debt. Credit card, medical, and bad car debts are always the leading contributors to a debtor choosing bankruptcy, especially chapter 7. For debtors facing accelerated balances, filing a Chapter 7 bankruptcy to relieve them from judgments and a debt-ridden future may be exactly what they need to get a fresh start. From beginning to end, a typical Chapter 7 lasts no more than six months, though some can be slightly shorter and other more complicated cases can last years. Once a Chapter 7 case is closed, the Debtor is free from most debt and free to live their life again. A word of caution: any new debt incurred after the filing of bankruptcy will not be discharged.

a. What is that “Fresh Start”?

Bankruptcy, especially Chapter 7, offers debtors the opportunity to leave unsecured debt behind them. Tangible benefits are obvious: unsecured debts (credit cards, personal loans, medical debt) are relieved, judgments can be stripped from a debtor’s real property, lawsuits must cease, etc… Simply stated, Chapter 7 allows your debtor client to move on from the creditor’s debt, as well as many other debts, at typically reasonable and affordable legal costs.

b. Reaffirmation Agreements

One exception to a “fresh start” could come in the form of a Reaffirmation Agreement. Reaffirmation Agreements are required by the U.S. Bankruptcy Code for auto loans IF you wish to keep the auto. It is fairly simple: if you wish to stay, you have to pay. Therefore, if your car has a loan on it and you wish to file bankruptcy, then you are going to be required to reaffirm that car loan IF you wish to keep that car. When you reaffirm an auto, then that reaffirmed debt survives bankruptcy and you will be obligated to continue to make payments toward it, even after the bankruptcy is closed. Similarly, if you should default on that reaffirmed debt, then the auto creditor can repossess the vehicle and even sue you for the difference on the reaffirmed debt. While most debtors tend to sign reaffirmations in order to keep their car, everyone should be well aware of the benefits and consequences of doing so. Arnold & Smith, PLLC has experienced attorneys in the field of bankruptcy and can help navigate the process for you. If you would like to set up a consultation with one of our bankruptcy attorneys, please do not hesitate to contact us.

c. The Means Test

In 2005, the US Bankruptcy Code was revised. One of the new additions was a commonly known, but misunderstood device called the “Means Test”. The Means Test is a 60-step mathematical process in which debtors’ household incomes are compared to a similar-situated household in the state. Included in those 60-steps are questions about your last six-months of income, your secured loans such as mortgages and auto loans, and even mundane calculations like whether you pay for internet or a home alarm system. It is an extremely convoluted process and any debtor would be well-advised to seek professional help.

Simply stated, if the debtor’s household income is greater than the average, they are forced into a repayment plan via a Chapter 13, infra. If the debtor’s income is less than the average, then they qualify (and can remain in) a Chapter 7. The concept is intuitive: if you can afford more than the average family, then you should be required to pay SOME of your debts. That’s a very important point: even if you should fail the Means Test and be given the only option of a Chapter 13 bankruptcy, realize that you will be required to make a monthly payment, but ONLY to the extent that you can afford. For instance, if you can only afford $300/month after normal expenses, then the Bankruptcy Court can only demand from you what you can afford. Whether that $300/month payment allows the creditors to receive 10% of their debts repaid or 90%, it does not matter. You have paid what you can afford and that is all that is demanded of you in a Chapter 13 should you fail the Means Test.

Charlotte Bankruptcy Lawyer Blog - Chapter 7 Bankruptcy