There is a new term that is terrorizing a lot of debtors right now: the means test. This is a compulsory test that you have to take prior to filing for bankruptcy. While it is not really a sit down and write-on-paper type of exam, it does analyze your capabilities financially. This was created to limit the Chapter 7 filings to those who really cannot afford to pay even a small portion of their debts.
It was noted that some high income earners filed for bankruptcy despite having the income to pay off their debts. It may not be enough to cover for the minimum payment but an amount can still be pooled in to pay for what was owed.
The means test begins by looking at the type of debt that you have. If it is a consumer debt, you are required to take it. The second phase involves checking your total income. If you are below the median income of the State where you filed for bankruptcy, you pass the means test immediately. But if it is above that, you need to do some further calculations.
For those who earn more than the median income, you need to deduct your monthly expenses from the average income that you earned for the past 6 months. The difference is called the disposable income that you can set aside for your debts on a monthly basis. The higher the amount, the less chances that you will be allowed to file for Chapter 7. When this happens, you have no choice but to file for Chapter 13.
There is an "allowed" list of expenses that you are permitted to deduct from your income. If your expenses include an exclusive membership or maintenance costs for a luxury car or yacht, that may not be considered an "allowed" expense.
There are cases, however, when the person has a high income but is allowed to file the Chapter 7 bankruptcy. This is when their disposable income is below the set amount.
But even though you pass the means test and you have the chance to wipe away all your debts and avoid the default on your mortgage payments, consider the various bankruptcy alternative first. Of course, if you fail and you are limited to a Chapter 13 filing, then it is more vital that you consider other debt relief options.
If you will be tasked to pay a portion of your debts, you can look into debt settlement. While the amount that you have to pay may be higher than that of a Chapter 13 repayment term, you don't suffer as much credit consequence in the process.
Debt settlement involves negotiating with your creditors/collectors to accept a reduction in your outstanding balance. It seeks to lower the amount so your payment terms will be reduced as well. In a best case scenario, you can get up to 70%-80% reduction on your original debt balance. It can get you debt free in 24-48 months.
Of course, you need to consider carefully how much you can really afford to pay. There are service charges that you should consider too - unless you opt to do the settlement process on your own.
Bottom line is, before you go for bankruptcy, try to settle first. If the creditors do not agree, you can simply go back to your original course of filing for bankruptcy.
