By Lauren Lamb
Most people know there were significant changes in the bankruptcy law in 2005. One of the biggest changes was the creation of the Means Test. The Means Test is an income test that uses your gross income, some of your actual expenses, and some IRS standard expenses- which are the amounts that the government thinks you should be spending on things- to determine whether you should have money left over at the end of the month with which to repay something to your unsecured creditors. Unsecured creditors include things like credit cards, medical bills and personal loans. Whether you pass the Means Test helps determine whether you can file a Chapter 7 bankruptcy, which allows you to eliminate your unsecured debts.
If you pass the Means Test and you otherwise qualify for a Chapter 7, you can safely move forward with filing a Chapter 7 bankruptcy. If you do not pass the Means Test, but would otherwise qualify for a Chapter 7 bankruptcy, there is a presumption that you should not qualify to have your unsecured debts forgiven in a Chapter 7, because you should have the ability to repay some money to those unsecured creditors in a Chapter 13 bankruptcy. If you still want to move forward with a Chapter 7 and you do not pass the Means Test, you must have evidence showing that you really do not have extra money that can be used to repay unsecured creditors. A couple of examples of these special circumstances are having to spend more than average on food due to dietary restrictions or having to spend more on transportation costs, because you work a long distance from home.
I have had many clients over the years who could not file a Chapter 7 solely because they did not pass the Means Test. If you compared their take-home income to their necessary living expenses, the numbers showed that they did not have any money to repay unsecured creditors, but the Means Test showed that they did, because it does not take into account all of your actual expenses. These clients had to file a Chapter 13 bankruptcy and repay a small amount, maybe only 5%, back to their unsecured creditors over 5 years. While the Chapter 13 provided a big benefit and savings to these clients, it is unfortunate when I have a client who is kept from filing a Chapter 7 just because they are unable to pass the Means Test.
While it is certainly hard to argue that there is any silver lining to the record unemployment numbers we are seeing due to the COVID-19 pandemic, for some people, a temporary period of unemployment may be the perfect time to file for bankruptcy. Many people will make less on unemployment than they did while working. That, coupled with the uncertainty surrounding when things will get back to normal and people will get back to work, will help some people qualify for a Chapter 7 that would not otherwise qualify when working due to the fact that they would not be able to pass the Means Test.
It is understandable that many people are in survival mode right now and are only concerned with staying healthy and getting through this pandemic. However, we will get through this and, while life may change in some ways, businesses will reopen, people will get back to work and we will achieve a new normal. It could be short-sighted and detrimental to not think about dealing with your debt at this time. If you wait until you get back to work to get your finances in order, your bankruptcy options may be limited.
Maybe you were struggling to pay your debt before the coronavirus or maybe being laid off due to the coronavirus is causing you to start to struggle with your debt. Either way, now is the time to contact Steidl & Steinberg for a free consultation to see if bankruptcy is the right option for you.