One of the first questions all of the clients I meet with want to know is: “should I file bankruptcy?” My answer always is: “it depends”.
Many people think I look at their income or their debt to income ratio. Those are things banks look at when you are trying to get a loan but the analysis of your situation is a little different. The best way to think about it is that bankruptcy is based on the ability to pay any portion of your debt. That is determined by looking at your take home pay on a monthly basis and subtracting all of your monthly living expenses from that. Monthly living expenses includes things like rent or a mortgage payment, food, utilities, car payment for a car you want to keep, gas and maintenance for your car, insurance, medical expenses and any other expenses that are not considered paying back debt. Basic living expenses does not include any payments on debt you are trying to get rid of in bankruptcy. If you are left with approximately $150 or less at the end of the month, then you will likely fit in a Chapter 7 bankruptcy. If you have more than $150 per month left over at the end of each month, then you will likely have to file a Chapter 13 bankruptcy.
For example: if your take home pay is $2500 a month and your basic living expenses are $2400 per month, then you will fit in a Chapter 7 bankruptcy. If your take home pay is $3500 a month and your basic living expenses are $3000 a month, you will likely have to file Chapter 13. Chapter 13 is a repayment plan and you pay what you can afford to pay for 3-5 years. In the above example you would pay $500 a month for 3-5 years. This means you would pay $18,000 to $30,000 back. But what if your total debt is $80,000? It doesn’t matter, because your payment is based on what you can afford, not on what you owe. At the end of the Chapter 13 the remaining debt that did not get paid back gets wiped out in your “discharge”.
If you have heard of the means test and are worried whether you pass it or not, all I can tell you is not to worry about it or put too much weight into it. I have clients who pass the means test but still have to file Chapter 13 based on the above analysis and I have clients who don’t pass the means the test and can file Chapter 7. If you have not heard about the means test, then don’t worry about it. There are day long seminars given for attorneys to understand the means test.
Hopefully this gives you a better understanding of how the analysis works. I welcome you to set up a free consultation with me if you would like me to look at your situation. I may be reached at 480-809-1014.