When you declare bankruptcy, you are "declaring" that you are financially insolvent. Most people recognize the signs of financial problems when they experience it—being behind on bills, threats of foreclosure, lawsuits, and repossessions, being unable to afford the necessities of life because of credit card obligations, etc., all point to a bankruptcy declaration. Unfortunately, part of the bankruptcy declaration is the acknowledgment that you don't earn enough income to make things right. You might think that not being able to pay off your debts because of your income is sufficient reason to declare bankruptcy, but you might not be right about that. Read on to learn more about how your income might affect your ability to get the debt relief you need.
The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA)
When the above act was passed in 2005, it brought some radical changes to existing bankruptcy laws. One of the major stumbling blocks presented to bankruptcy filers were rules about income and the means to pay your bills. You must now pass an income test known as the "means test". This test compares a filer's income to the state's median income. If your income is below or at the median, you pass the means test. If not, you will need to take further steps.
Overcoming the Means Test
The income of the filer for the last six months only is considered for the means tests, which can help those who previously had a high-paying position but now find themselves in dire straits. The difference in your income and the state's median must be accounted for. For example, if your state's median income is $50,000 and your income is $60,000, you must find ways to eliminate at least $10,000 of your income in order to file. These deductions must be expenses that are excessive and unusual such as:
- A larger than usual mortgage payment or other secured debt payments (cars, etc).
- Expenses related to caring for a handicapped person or special needs child.
Other BAPCPA Changes
In addition to the income limits for filing, the act also imposed several other restrictions on filers. Since this act was focused on reducing the number of filings (particularly serial filings), the changes include:
- Lower exemptions – exemptions allow the filer to lower the value of their property in an effort to avoid forfeiting it to the bankruptcy trustee.
- Education requirements – filers now must take two different financial education classes before the bankruptcy can be final.
To learn more about the means test and obtain chapter 7 bankruptcy filing assistance, speak to your bankruptcy attorney.