When individuals in Alabama become overwhelmed with debt, they often consider filing for bankruptcy. Many debtors file Chapter 7 bankruptcy, which is a liquidation of assets to pay creditors. Debts get discharged faster, but the filer must pass a means test.
The updated bankruptcy law
Congress revised the bankruptcy code in 2005 under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). It enacted this law to prevent high earners from using bankruptcy to avoid debt and encourage more Chapter 13 filings. Chapter 13 reorganizes debts into a manageable payment plan over three to five years.
Under the new law, all debtors filing for bankruptcy must take court-approved credit counseling. It also restricts how often people may file and the types of debts individuals can discharge.
The means test
The amendment to the old law includes a means test to determine a person’s eligibility for Chapter 7 bankruptcy. The first part compares an individual’s income to the median for a household of the same size using Form 122A-1. If the debtor exceeds that amount, he or she must proceed to the second part using Form 122A-2 to calculate his or her disposable income, which considers increases and decreases in wages.
If a person’s disposable income exceeds the threshold after essential debts are deducted, he or she cannot file Chapter 7. Essential debts include mortgage, rent, utilities, food, public transport, medical and domestic obligations.
If a debtor fails both parts, there are a few exceptions that don’t require a means test. Bankruptcy is only for personal debts, and people with business debt are exempt from the means test. Disabled veterans with debt accrued during service, Homeland Security members on active duty and reservist service members deployed before filing are exempt.
Bankruptcy offers a fresh start to debtors, but it requires careful navigating to succeed. To increase the chance of a successful case, a person should seek attorney services.