| With the new bankruptcy law in effect as
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| | income but do NOT have at least $166.67
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| of October 17, 2005, there is a lot of
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| | per month to pay toward your debts? Then
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| confusion with regard to the new "means
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| | the final part of the means test is
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| test" requirement. The means test will be
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| | applied. If the available income is less
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| used by the courts to determine
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| | than $100 per month, then Chapter 7 again
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| eligibility for Chapter 7 or Chapter 13
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| | becomes an option. If the available
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| bankruptcy. The purpose of this article
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| | income is between $100 and $166.66, then
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| is to explain in plain language how the
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| | it is measured against the debt as a
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| means test works, so that consumers can
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| | percentage, with 25% being the benchmark.
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| get a better idea of how they will be
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| | In other words, let's say your income is
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| affected under the new rules.
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| | above the median, your debt is $50,000,
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| When most people think of bankruptcy,
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| | and you only have $125 of available
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| they think in terms of Chapter 7, where
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| | monthly income. We take $125 times 60
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| the unsecured debts are normally
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| | months (5 years), which equals $7,500
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| discharged in full. Bankruptcy of any
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| | total. Since $7,500 is less than 25% of
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| variety is a difficult ordeal at best,
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| | your $50,000 debt, Chapter 7 is still a
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| but at least with Chapter 7, a debtor can
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| | possible option for you. If your debt was
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| wipe out the debts in full and get a
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| | only $25,000, then your $7,500 of
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| fresh start. Chapter 13, however, is
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| | available income would exceed 25% of your
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| another story, since the debtor must pay
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| | debt and you would be required to file
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| back a significant portion of the debt
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| | under Chapter 13.
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| over a 3-5 year period, with 5 years
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| | To sum up, first figure out whether you
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| being the standard under the new law.
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| | are above or below the median income for
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| Prior to the advent of the "Bankruptcy
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| | your state (median income figures are
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| Abuse Prevention and Consumer Protection
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| | available at Be sure to account for your
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| Act of 2005," the most common reason for
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| | spouse's income if you are a two-income
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| someone to file under Chapter 13 was to
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| | family. Next, deduct your average monthly
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| avoid the loss of equity in their home or
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| | living expenses from your monthly income
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| other property. And while equity
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| | and multiply by 60. If the result is
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| protection will continue to be a big
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| | above $10,000, you're stuck with Chapter
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| reason for people to choose Chapter 13
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| | 13. If the result is below $6,000, you
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| over Chapter 7, the new rules will force
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| | may still be able to file Chapter 7. If
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| many people to file under Chapter 13 even
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| | the result is between $6,000 and $10,000,
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| if they have NO equity. That's because
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| | compare it to 25% of your debt. Above
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| the means test will take into account the
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| | 25%, you're looking at Chapter 13 for
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| debtor's income level.
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| | sure.
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| To apply the means test, the courts will
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| | Now, in these examples, I have ignored a
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| look at the debtor's average income for
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| | very important aspect of the new
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| the 6 months prior to filing and compare
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| | bankruptcy law. As stated above, the
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| it to the median income for that state.
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| | amount of monthly income available toward
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| For example, the median annual income for
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| | debt repayment is determined by
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| a single wage-earner in California is
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| | subtracting living expenses from income.
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| $42,012. If the income is below the
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| | However, the figures used by the court
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| median, then Chapter 7 remains open as an
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| | for living expenses are NOT your actual
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| option. If the income exceeds the median,
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| | documented living expenses, but rather
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| the remaining parts of the means test
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| | the schedules used by the IRS in the
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| will be applied.
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| | collection of taxes. A big problem here
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| This is where it gets a little bit
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| | for most consumers is that their
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| trickier. The next step in the
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| | household budgets will not reflect the
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| calculation takes income less living
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| | harsh reality of the IRS approved
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| expenses (excluding payments on the debts
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| | numbers. So even if you think you are
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| included in the bankruptcy), and
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| | "safe," and will be able to file Chapter
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| multiplies that figure times 60. This
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| | 7 because you don't have $100 per month
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| represents the amount of income available
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| | to spare, the court may rule otherwise
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| over a 5-year period for repayment of the
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| | and still force you into Chapter 13. Some
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| debt obligations.
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| | of your actual expenses may be
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| If the income available for debt
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| | disallowed. What remains to be seen is
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| repayment over that 5-year period is
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| | how the courts will handle cases where
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| $10,000 or more, then Chapter 13 will be
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| | the cost of mortgages or home rentals are
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| required. In other words, anyone earning
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| | inflated well above the government
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| above the state median, and with at least
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| | schedules. Will debtors be expected to
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| $166.67 per month of available income,
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| | move into cheaper housing to meet the
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| will automatically be denied Chapter 7.
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| | court's required schedule for living
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| So for example, if the court determines
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| | expenses? No one has any answers to these
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| that you have $200 per month income above
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| | questions yet. It will be up to the
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| living expenses, $200 times 60 is
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| | courts to interpret the new law in
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| $12,000. Since $12,000 is above $10,000,
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| | practice as cases proceed through the
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| you're stuck with Chapter 13.
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| | system.
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| What happens if you are above the median
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