Today's law allows debtors, for the most part, to choose the type of bankruptcy they want to file, though there are reasons a debtor might choose one chapter over another. For example, a chapter 13 case allows a debtor to catch up on missed payments owed to creditors holding a security interest in collateral, such as a mortgage or auto lender, and therefore may be a better choice for some debtors. As long as the debtor's plan has been approved by the court and the debtor is maintaining payments to the trustee, the collateral will be protected from repossession.
Under the new bankruptcy law, access to chapter 7 when debts of the debtor are primarily consumer debts, i.e. debts incurred for household or personal use, must be determined based on a formula known as the "means test". Debtors whose debts are primarily business debts, i.e. debts incurred in the course of doing business, are not subject to the "means test". Individual debtors with primarily consumer debts who want to file a case under chapter 7 will have their finances examined to determine if they can afford to pay some money to creditors. If they can, based on a set formula know as the "means test," they will not be eligible to file a chapter 7.
If they want to file a bankruptcy, they will need to file a chapter 13. The "means test" is designed to insure that people who can afford to pay some portion of their debts to do so rather than discharging all their debts in a chapter 7.
The means test compares the debtor's excess monthly income to the amount of unsecured debt to determine how much a debtor could repay to creditors if he were in a chapter 13. Because this calculation is hypothetical, it is based on your gross monthly income over the last six (6) months, which may not necessarily be your current monthly income, and does not necessarily reflect the debtor's true financial condition. A debtor who appears to be able to repay the minimum portion of his debts but who, in reality, cannot, may be permitted to stay in a chapter 7 case. Unfortunately, the means test is more complicated than we can explain well here.
When considering whether or not you qualify for a Chapter 7
- The total amount of debt owed to creditors
- The total value of all personal belongings and real property
- An accurate estimate of monthly expenses
- An accurate estimate of monthly income, including your spouse if married
- Your income over the last six (6) months, including your spouse if married
- The status of any mortgage
- All monthly payments made on secured debts
- All interests in any real property, time share property, etc. other than your residence