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CHAPTER 7

NEW LAW CHANGES:

Financial Management Course

Before you can file for bankruptcy under either Chapter 7 or Chapter 13 you must obtain a certificate from an agency approved by the U.S. Trustee's office.  It is expected that this can be done over the internet and will likely cost approximately $50.00.  Your attorney will provide you with information on how to obtain this counseling. 

Under the old rules, most filers could choose the type of bankruptcy that seemed best for them -- and most chose Chapter 7 over Chapter 13. The new law will prohibit some filers with higher incomes from using Chapter 7.

Restricted Eligibility for Chapter 7

Under the new rules, the first step in figuring out whether you can file for Chapter 7 is to measure your "current monthly income" against the median income for a family of your size in your state. Your "current monthly income" is not your income at the time you file, however: It is your average income over the last six months before you file. For many people, particularly those who are filing for bankruptcy because they recently lost a job, their "current monthly income" according to these rules will be much more than they take in each month by the time they file for bankruptcy.

Once you've calculated your income, compare it to the median income for your state.  If your income is less than or equal to the median, you can file for Chapter 7. If it is more than the median, however, you must pass "the means test" -- another requirement of the new law -- in order to file for Chapter 7.

The Means Test

The purpose of the Means Test is to determine if you have enough disposable income to make payments into a Chapter 13 plan.

To calculate if you "pass" the Means Test you must first determine your current monthly income.  To do this you average your income over the previous six months.   From this figure you subtract the IRS Allowable Living Expenses, (see sidebar link) then, finally, you subtract your secured and priority debts

If you are unable to pay at least $6,000 over the next five years ($100 per month) you will likely qualify for a Chapter 7 bankruptcy. However, if you can pay at least $10,000 over five years ($166.67 per month or more) your Chapter 7 will likely be denied.

If you could afford more than $6,000 but less than $10,000 over five years, then a mathematical calculation determines whether your Chapter 7 will likely be successful or not. If you could afford to pay 25% or more of your unsecured debt, then a Chapter 7 will likely be denied. If you can't afford to pay 25% of your unsecured debt, your Chapter 7 filing will likely be successful.

Property Must Be Valued at Replacement Cost

Under the old law, Chapter 7 filers could value their property at what they could sell it for in a garage sale.  This meant that used furniture, appliances, cars, jewelry and other property a debtor might want to keep were typically valued low and  fell well within the "exempt property" categories offered by most states. (Exempt property is property that cannot be taken by creditors or the trustee -- you are entitled to keep it.)

Under the new law, property must be valued at replacement cost, taking into account it's age and condition.  Now the value of property will be higher and more debtors could have their property taken and sold by the trustee.

State Exemptions Aren't Available to Recent State Residents

Under the old bankruptcy law, the personal property debtors were allowed to keep in Chapter 7 bankruptcy was determined by the laws of the state where they lived  as long as they lived there for at least six months. Under the new law, you must live in a state for at least two years prior to filing in order to use that state's exemption laws. Otherwise, you must use the exemptions available in the state where you used to live. Similar rules apply to homestead exemptions, which determine how much equity in a home you can keep when filing for Chapter 7 bankruptcy. However, to use your new state's homestead exemption, you must live there for at least 40 months.




We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code