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Chapter 7 and the means test 101

Many people do not realize how crippling debt can be until they find themselves dodging phone calls from creditors and ignoring electronic and snail mail demand notices. There is even a misconception that individuals who cannot pay their financial obligations are irresponsible and living beyond their means. While that may be true for some, debt is a significant problem for many Metro Detroit and Ann Arbor households. 

Fortunately, the government offers consumers protection in the form of bankruptcy to those struggling to get their finances under control. Chapter 7 is often more appealing to anyone who wants to discharge their debts. However, there is a means test to determine if it is the best fit. Here is a breakdown of what the Chapter 7 bankruptcy means test is and how it works. 

What is the Chapter 7 means test? 

The means test keeps people from defrauding the government and creditors. The courts need more than just the filer's word that she or he qualifies to have debts discharged. To ensure that those who cannot pay their debts because they have insufficient income can take advantage of Chapter 7’s benefits, the courts evaluate all sources of household income and certain expenses to determine how much, if any, disposable income is available each month for repayment. This compares the person's total income against the state’s median. If the amount of calculated disposable income is above the median, Chapter 7 may not be off limits to the debtor. The courts will compare the filer’s disposable income and certain expenses to the acceptable standard. 

Is Chapter 13 a better option? 

Chapter 7 offers individuals a way out of their financial situations, but everyone who qualifies may benefit more from Chapter 13 bankruptcy. Not paying off old debts is serious, and so is having them discharged through bankruptcy. Many creditors and lenders keep track of debtors who have their obligations written off, which can make it challenging for debtors to open new accounts with them in the future. Chapter 13 allows for repayment and is often a better option, especially if one has more secured debt.

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