BANKRUPTCY REVIEWS

Chapter 7 Bankruptcy Means Test

THE CHAPTER 7 MEANS TEST

As we have said in another article, chapter 7 bankruptcy is much better than chapter 13 bankruptcy. But in spite of that, many people still file chapter 13 bankruptcy, many of them do so because they have been told by bankruptcy lawyers that they make too much money to qualify for chapter 7 bankruptcy. It comes down to the chapter 7 bankruptcy means test.

Have you been told that you do not qualify for chapter 7?

If you have been told that you make too much money to qualify for a chapter 7 bankruptcy discharge, chances are that it was told to you by a bankruptcy lawyer who did not care to take the extra effort to make you qualify. He or she just ran the means test and gave you the bad news, so you decided to file chapter 13. 

Just about anyone can be made to qualify for a chapter 7 bankruptcy discharge if they only knew how to do it.

Why do bankruptcy lawyers not make the extra effort to get their clients to qualify for a chapter 7 bankruptcy discharge? The answer will surprise you.

There is a lot more money for bankruptcy lawyers in chapter 13 bankruptcy than in chapter 7 bankruptcy, so most lawyers are glad to tell you that you do not qualify for chapter 7. Chapter 13 lawyers can make as much as $7,000 to $8,000 on a single chapter 13 bankruptcy case in their legal fees compared to about $1,500 for a chapter 7. So many of them push their clients into chapter 13. 

It is all about the money and as we all know, lawyer jokes are no laughing matter. For most lawyers, it is not about right and wrong or about justice. It is about the money, so it is no surprise that many lawyers steer their clients into chapter 13 instead of chapter 7.

The means test

Before we talk about how most people can pass the means test, let us take a close look at the means test. What is it?

The means test was something that the credit card lobbies bribed congress in 2005 into passing so that they can make it harder for people to discharge their credit card debts. They did this with the support of bankruptcy lawyer lobbying groups who it as an opportunity to heard debtors into the more profitable chapter 13s.

The means test set limits on the disposable income that a person or family can earn and still qualify to have their debts discharged in a chapter 7 case. Before that, it was entirely up to the judge to decide if you were insolvent and thus, entitled to a discharge.

The operative word here is "disposable income," and in order to determine the disposable income, the law set up a complicated set of calculations that had to be performed. These calculations took into account the size of the household, the income, the amount of debt, the age of the debtor, the state and county the debtor lives in, and a lot more.

In order to perform the calculation, one has to look up tables of government data compiled by the census bureau, the IRS and other government agencies. The amount of data to look up is so immense that only a sophisticated computer program can accurately and quickly connect to the government databases, lookup the data and crunch the numbers. These kinds of programs cost hundreds of dollars and are affordable to bankruptcy lawyers, but not to the average consumer. Again the idea was to so complicate the process that everyone would have to hire a bankruptcy lawyer instead of try to do it themselves. And when you hire the lawyer, they have a financial incentive to push you into chapter 13 instead of chapter 7. 

How can the average person get a break?

The bankruptcy means test law was essentially trying to fix a problem that did not exist. People who can pay their bills do not usually file bankruptcy. Filing bankruptcy is not something that people do for fun. If a person is seriously considering filing bankruptcy, it is because they really need to file bankruptcy. That mere fact means that the vast majority of people who file bankruptcy already qualify to get a chapter 7 bankruptcy discharge. It is just that simple. This means that if you are in serious financial trouble, chances are that you already qualify for a chapter 7 bankruptcy discharge.

The problem is for the few people who have a good income but too much debt. These are the people who may at first not meet the means test requirements. If a bankruptcy lawyer is going to rightly tell a person that they do not qualify for a chapter 7 bankruptcy discharge, it will be the  people with good income. So how do these people qualify for the discharge anyway?

The answer lies in the fact that in the United States, when there is a multiplicity of rules to a law, there is a multiciplicity of loopholes to that law. In other words, the more rules that a law has, the more the loopholes to get around it. Because the means test law is so complicated, there are many way to get around it.

For example here is one glaring loophole in the means test law. The chapter 7 means test law takes into consideration your charitable contributions. The more money you say that you will gift to charitable causes, the more the needle moves in the direction of qualifying. But nothing limits the charitable cause to well know public charities. So you can just as easily donate to your indigent relatives as a form of charity and have it deducted from your disposable income for the means test.

The debt that you owe also plays a small role in reducing your disposable income. Since most the actual debt that you owe is often a moving target and could be a lot higher than what you may have thought, estimating your debt sincerely on its higher limit will reduce your disposable income. Keep in mind that this reduction is not a one-to-one reduction.

There are many more similar loopholes in the means test law and some are even more effective than the two examples just mentioned. Some of the full-service companies we have reviewed on this site, include all of the means test loopholes in their vault of bankruptcy knowhow that they make available to their customers.

So the bottom-line is that you most likely already qualify for a chapter 7 bankruptcy discharge without having to use any loopholes in bankruptcy law, but if you have been told that you earn too much to qualify, that is not the final verdict.



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