Bankruptcy Means Test Explanation
As mentioned earlier, the means test is a document you will fill out at the beginning of your bankruptcy filing process to determine your eligibility and repayment plan. To complete this form, you will need to report a few things. The first is your income.
Here are some things to keep in mind when reporting your income on your Michigan bankruptcy means test document:
- You must report their income even if your spouse is not filing with you. The means test considers the entire household's income, not just the individual filing. There are some exceptions, especially if you are legally separated from your spouse but still living in the same residence.
- Your household income is compared to the mean monthly income of households in Michigan. This determines your eligibility for bankruptcy and what repayment plan you may be considering.
- Some forms of income, namely any Social Security or other retirement income, do not count as income on your means test. Ensure you understand what you do not have to disclose to have the best chance of approval.
- If you have an unstable or variable monthly income, the average of your past six months is used. To find this, you would add each month of income for the past six months together and then divide the sum by 6. The number you end up with is what you would report as your average monthly income.
Chapter 13 Bankruptcy Means Test and Debt Limits
To be able to file for Chapter 13 bankruptcy, there are a few income limits an individual has to meet. First, the individual has to have less than $465,275 of unsecured debt. This is a part of the Chapter 13 debt limit. Unsecured debt is any form of debt that is not backed by an asset that can be held as collateral. This means that if you could not repay your unsecured debt, there wouldn’t be anything the creditor could repossess to recoup the lost payments. Unsecured debt includes things like credit card debt, medical bills, utility bills, and more.
$1,395,875 in secured debt. Secured debt is debt that is backed by collateral. This can include things like home mortgages, car loans, and other loans where something can be repossessed to recoup the cost of nonpayment.
Other Requirements
Debt limits are not the only requirements for filing for Chapter 13 bankruptcy. There are other requirements, such as:
- Only an individual can apply for Chapter 7 & 13 bankruptcy. Businesses are not eligible for these.
- The individual cannot have had a bankruptcy case dismissed within the previous 180 days. There are exceptions if emergencies or an error caused the dismissal. The court decides on those cases individually.
- The individual cannot have had a Chapter 13 bankruptcy completed within the past two years (four years if it was a Chapter 7 bankruptcy). This means that if you went through the bankruptcy process successfully and had some of your debts discharged within this timeframe, you are not eligible and will have to wait for the time to pass.
- The individual has taken the required credit counseling courses. When filing for Chapter 7 or 13 bankruptcy, you must complete two credit education courses with a court-approved debt counselor. Failing to do so would prevent you from eligibility.
- The individual must have filed all tax returns for the previous four years.
- For Chapter 13 bankruptcy, you have enough disposable income to repay the bankruptcy trustee monthly, who will then distribute the payment amongst the various creditors and other fees. If you lack disposable income, the court may decline your case and recommend Chapter 7 bankruptcy.
If you meet these requirements, the court may approve your case. That said, you may consider the pros and cons as well. For example, your credit score and report may be negatively affected.
Are There Any Details Of The Bankruptcy Means Test Specific to Michigan?
The means test itself does not change from state to state. However, the test compares your average monthly income to the state’s household average monthly income. Because of this, where you live may change the average income to which your income is compared.
For example, the means test income levels would not differ between Detroit and Grand Rapids, but that income limit may vary between Michigan and California.
Options If You Fail the Bankruptcy Means Test in Michigan
If you fail the means test for bankruptcy, it simply means that you are not eligible for that specific type of bankruptcy. With Chapter 13, failing the means test means you do not have enough disposable income to pay at the end of each month to the bankruptcy trustee. Because of this, the court cannot grant you a Chapter 13 bankruptcy, which may require sizable monthly payments. You have many other options regardless of why you failed the means test.
Chapter 13 Bankruptcy:
If you were denied for Chapter 7 bankruptcy, you may want to consider filing for Chapter 13. You were likely denied Chapter 7 because you make too much money. Luckily, Chapter 13 bankruptcies rely on individuals making more than they need to help pay off their debts.
In a Chapter 13 bankruptcy, this is a restructuring of your debt. It may be a 3-5-year payment plan and will be a monthly payment. There are two parts to the payment plan: the attorney fees range from $2500 to $6000. The other part is that they will look at your non-exempt equity and disposable income to determine how much of the unsecured debt you repay. Potentially, you could pay none, some, or all of the debt back, so your income and assets play a big role in determining the payment for Chapter 13.
If you were denied Chapter 13, you didn’t make enough money to afford monthly payments at the end of each month. Because of this, you may qualify for Chapter 7 bankruptcy. If you were denied one form of bankruptcy, see if you are eligible for the other.
Debt Settlement:
Debt settlement is another option you have, but it may be riskier. Either you or a company negotiates on your behalf with your creditors until they agree to a lower debt balance that you can then pay off, leaving a portion of your debt forgiven. An example of this may be the following: Say you owe $30,000 in debt. You may approach your creditor and negotiate the amount down to $15,000. Often, especially if you are working with a debt settlement company, you may have created an account that holds a sum of money that you are willing to pay immediately. If the creditors agree, you will have $15,000 of forgiven debt once the remaining sum is paid off.
This option has some potential negatives, namely that you may have to fall behind on your payments by about six months for your creditors to be willing to negotiate. Not only does this put you at risk of being sued by the creditor, but it also impacts your credit score for up to seven years.
There also may be potential taxes on the forgiven debt, so keep that in mind. Another con is that there is no legal protection. If a creditor does not want to agree to a new monthly payment, they may try to sue you for the money instead, so the program's success may depend on your creditor mix and how likely they are to settle.
Debt Management:
You could also look into a debt management program. Debt management programs are also known as credit counseling. When you are working with a debt management company, you will have to report your entire financial situation to the entity.
The firm will work to negotiate lower interest rates on any loans or other lines of debt you have. This can take anywhere from 36-60 months. The downside to this option is that you still have to pay off everything you owe. The good news is that it won’t hurt your credit as much as some of the other options may.
Conclusion
Overall, the means test is just a way to see what forms of bankruptcy you may qualify for. Using the Chapter 7 means test calculator for Michigan can help you better understand your financial situation and whether or not bankruptcy is right for you. If you have any questions or want to talk more in-depth, feel free to contact a local attorney and set up a free consultation.
