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The New Bankruptcy Law
"Means Test" Explained in Plain English
With the new bankruptcy law in effect since October 17,
2005, there is a lot of confusion with regard to the new
"means test" requirement. The means test is used by the
courts to determine eligibility for Chapter 7 or Chapter 13
bankruptcy. The purpose of this article is to explain in
plain language how the means test works, so that consumers
can get a better idea of how they will be affected under the
When most people think of bankruptcy, they think in terms
of Chapter 7, where unsecured debts are normally discharged
in full. Bankruptcy of any variety is a difficult ordeal at
best, but at least with Chapter 7, a debtor was able to wipe
out their debts in full and get a fresh start. Chapter 13,
however, is another story, since the debtor must pay back a
significant portion of the debt over a 3-5 year period, with
5 years being the standard under the new law.
Prior to the advent of the "Bankruptcy Abuse Prevention
and Consumer Protection Act of 2005," the most common reason
for someone to file under Chapter 13 was to avoid the loss
of equity in their home or other property. And while equity
protection will continue to be a big reason for people to
choose Chapter 13 over Chapter 7, the new rules will force
many people to file under Chapter 13 even if they have NO
equity. That's because the means test will take into account
the debtor's income level.
To apply the means test, courts look at the debtor's
average income for the 6 months prior to filing and compare
it to the median income for that state. For example, the
median annual income for a single wage-earner in California
is $42,012. If the income is below the median, then Chapter
7 remains open as an option. If the income exceeds the
median, the remaining parts of the means test comes into
This is where it gets a little bit trickier. The next
step in the calculation takes income, less living expenses
(excluding payments on the debts included in the
bankruptcy), and multiplies that figure times 60. This
represents the amount of income available over a 5-year
period for repayment of the debt obligations.
If the income available for debt repayment over that
5-year period is $10,000 or more, then Chapter 13 will be
required. In other words, anyone earning above the state
median, and with at least $166.67 per month of available
income, will automatically be denied Chapter 7. So for
example, if the court determines that you have $200 per
month income above living expenses, $200 times 60 is
$12,000. Since $12,000 is above $10,000, you're stuck with
What happens if you are above the median income but do
NOT have at least $166.67 per month to pay toward your
debts? Then the final part of the means test is applied. If
the available income is less than $100 per month, then
Chapter 7 again becomes an option. If the available income
is between $100 and $166.66, then it is measured against the
debt as a percentage, with 25% being the benchmark.
In other words, let's say your income is above the
median, your debt is $50,000, and you only have $125 of
available monthly income. We take $125 times 60 months (5
years), which equals $7,500 total. Since $7,500 is less than
25% of your $50,000 debt, Chapter 7 is still a possible
option for you. If your debt was only $25,000, then your
$7,500 of available income would exceed 25% of your debt and
you would be required to file under Chapter 13.
To sum up, first figure out whether you are above or
below the median income for your state - median income
figures are available at http://www.new-bankruptcy-law-info.com.
Be sure to account for your spouse's income if you are a
two-income family. Next, deduct your average monthly living
expenses from your monthly income and multiply by 60. If the
result is above $10,000, you're stuck with Chapter 13. If
the result is below $6,000, you may still be able to file
Chapter 7. If the result is between $6,000 and $10,000,
compare it to 25% of your debt. Above 25%, you're looking at
Chapter 13 for sure.
Now, in these examples, I have ignored a very important
aspect of the new bankruptcy law. As stated above, the
amount of monthly income available toward debt repayment is
determined by subtracting living expenses from income.
However, the figures used by the court for living expenses
are NOT your actual documented living expenses, but rather
the schedules used by the IRS in the collection of taxes.
A big problem here for most consumers is that their
household budgets will not reflect the harsh reality of the
IRS approved numbers. So even if you think you are "safe,"
and are able to file Chapter 7 because you don't have $100
per month to spare, the court may rule otherwise and still
force you into Chapter 13. Some of your actual expenses may
What remains to be seen is how the courts will handle
cases where the cost of mortgages or home rentals are
inflated well above the government schedules. Will debtors
be expected to move into cheaper housing to meet the court's
required schedule for living expenses? No one has any
answers to these questions yet. It will be up to the courts
to interpret the new law in practice as cases proceed
through the system.
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Bankruptcy: What To
Expect If You File For Bankruptcy
First, understand that filing bankruptcy should be a last
resort if you have borrowed money and have absolutely no way
or repaying it. Filing for bankruptcy will have a negative
effect on your credit history for 10 years or longer and may
also adversely impacts your quality of life.
If you do declare bankruptcy, here are some things to
expect. First, you will need to be prepared to explain to a
bankruptcy judge or trustee how you got yourself into such a
financial pickle. You will be asked some very tough
questions and need to be ready with good answers. It will
not be an easy or fun task.
The only credit cards you will probably be allowed to
keep are those that were completely paid off before you
declared bankruptcy. You will most likely lose all others.
Once you file for bankruptcy, you will have trouble
getting a mortgage, a loan, new credit cards, life insurance
and even some jobs. This is because there are employers who
are skittish about hiring people who have filed for
bankruptcy as they feel it demonstrates a lack of restraint
Some of your debts will not be discharged. This includes
child support, student loans and back taxes. So if you think
filing for bankruptcy will relieve you of that $12,000 you
owe Uncle Sam, think again.
Keep in mind that a bankruptcy will stay on your credit
report for at least 10 years. This means that if you’re 35,
you’ll be 45 before you can apply for a credit card, a
mortgage, a loan or a job without the potential lender or
employer seeing that you were once bankrupt.
The good news
Despite what you may have been told, it is possible to
get a loan after filing for bankruptcy. It is called a
bankruptcy loan and its purpose is to help you get back on
your feet and reestablish your finances.
A bankruptcy loan is usually available only after your
creditors have been paid and your bankruptcy dismissed. If
you filed a Chapter 13 (reorganization) bankruptcy, your
creditors must be paid in full before you apply for a large
loan. And if you filed a Chapter 7 bankruptcy, you must wait
at least two years after the bankruptcy to apply.
The best way is to prove to potential creditors that you
are no longer a bad risk is by paying all your bills on
time, and showing that you can now handle a credit card.
Once you have a track record for paying your bills on time,
and have successfully maintained a credit card, you can ask
your creditors for reference letters to prove to potential
lenders that you have become credit worthy.
You should also know that there are lenders out there who
will offer you a loan while you are still in bankruptcy as a
way of paying off your creditors. Don’t be lured into this.
It usually just paves the way for further disaster as you
are simply adding debt to debt. As a wise man once said, you
just can’t borrow your way out of debt.
Going through bankruptcy can be a painful and
embarrassing experience. Be sure you consider all possible
alternatives before filing. You might find that bankruptcy
is easy to get into but very, very difficult to get out of.
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Credit Card Debt:
Repair After Bankruptcy
Ah, credit card debt. You've asked yourself the question
many times, "Will I ever get credit again?" The answer,
although seemingly complex, is quite simple: Yes. You can
have another chance at re-establishing your credit. Filing
bankruptcy is the first intelligent step taken to wiping out
accrued credit card debt. The next step you'll have to take
is to repair your credit report. In order to do this, you'll
need to develop great patience while you're re-establishing
your credit, as these things do take time.
Two or three years after you've eliminated credit card
debt by filing bankruptcy, you'll want to start rebuilding
good credit. How, you ask? Apply for secured credit cards.
Preferably cards without annual fees attached to them. Do
your research on the internet to see what others have done
in similar situations. If you come across an offer which
looks to good to be true, it most likely is. Use discretion
when giving out Social Security numbers and personal
Start small. Don't expect anyone to hand you a $10,000
credit limit overnight. You've had a history of credit card
debt, it's not going to happen. Make lenders trust you
again. Make monthly payments in the full amount. Your
payment transactions will determine how successful your new
credit report will be. If you're late with payments you're
heading in the wrong direction. You don't want to end up on
the road to credit card debt or bankruptcy again, do you? Of
The stronger your current financial condition is, the
better candidate you may be for future credit. Convince
lenders that you've left the past behind you. You've changed
your ways. Show them how you've handled money since the
bankruptcy. Prompt payments made in a full amount are very
impressive to a credit lender. If you're denied a major
credit card, don't get distraught. Try applying for a
department store's line of credit or a card issued by an oil
company. These are some small steps to a successful
It's also important to keep an eye on your credit report.
Make sure that everything is accurate and appears is it is
supposed to. Errors, which can go unacknowledged will only
harm you in the future. Your local bank can give you a copy
of your current credit report for a nominal fee. However, if
you're a legal resident of the United States, you are
eligible to receive free credit reports. Specifically, one
credit report per year.
In 2005, the Federal Trade Commission announced that
every United States citizen is eligible to receive one free
credit report on an annual basis, regardless of where they
live. This was wonderful news to Americans everywhere. To
receive your free credit report, you must supply proof of
your identity. Questions you may be asked will include: your
name, address, social security number, and a personal
question [for security purposes] that only you will know.
Nevertheless, be very careful. There's a wide number of
companies who will promise free credit reports. But are they
legitimate? Anyone can build a website and claim that
they're a credit agency. Why risk giving out your personal
information to a stranger? Identity theft has become
increasingly popular. Don't fall prey to a fraudulent credit
agency that you know absolutely nothing about. Do some
background research on the company prior to using their
services. If you can't find any information relating to
their services they're probably not very trust-worthy.
Credit reports can be received online or through physical
mail. Be certain that the company which is offering free
credit reports is being employed by the FTC. Bear in mind,
anyone can say they're affiliated with the FTC. Make sure
that they're legitimate. Such a fiasco occurred recently on
the internet. Thousands of people were taken advantage of
when they filled out a form for a "free credit report."
Don't give out your information to anyone but a trusted
bank, a reputable mortgage broker, or an agency employed
through the Federal Trade Commission.
Life After Bankruptcy:
7 Tips To Get Your Life On Track After Bankruptcy
A life in bankruptcy is not an unbearable phase if you
look at it from a positive angle. If you found it
unbearable, I'm sure you won't want to go through it again.
While the court 'reorganizes' you by selling your personal
assets to pay off your debts, so too you must reorganize
your thoughts and look forward to live a life of prudence.
Here are 7 tips you can apply to get your life back on
track as soon as possible so that you can find a way to
return to a lifestyle of less financial worries and
gradually break free from the shackles of an unpleasant
1) Seek sincere help. In modern societies where urbanites
get too busy in their own lives, it is not surprising to
have people whom you know suddenly turn their backs on you
when you seek their assistance. It's like they are thinking,
"I can't believe it. I've never been a bankrupt so why are
you so deep in the dumps?" Forget about these people. Your
immediate family will be the first to know your situation
and only they can give you continued love and support. Make
a checklist of names and how they can help you as much as
what you can do for them, as well as (very) close friends
whom you know can depend on.
2) Be responsible. And I mean REALLY responsible. Once
bitten twice shy; don't get mired in debt again. You can
blame on exorbitant increase in the cost of living, that
business partner who sued you or the failing stock market
but they are not going to say sorry anytime. It's time to
take a critical look at your spending habits and evaluate
them, understanding where you have wasted and invested your
money. Do a monthly plan-and-review for your savings and
expenditure. A very good hint of wastage is putting your
money in places you don't know much of. Learn how to
disengage from risks which you can't afford to get involved.
3) Get paid work immediately. Get your life productive
again. There is no more greater blessing than learning to
appreciate your ability to earn your keeps. Within your
checklist, you should have a couple of people whom you can
approach in this area. Leverage on your experience and
expertise to make an offer of what you can contribute to
4) Join a credit union. Such helpful organizations can
offer loans which normal institutions like banks will not do
otherwise, but make sure there's confidence on both sides
that you can repay the loan.
5) Far too many people never had a concrete
financial/retirement plan even though they know it's
important. Engage a financial advisor to be your personal
counsel. Set aside cash reserves for rainy days or
emergencies. Find adequate insurance to protect your
remaining assets and family. Avoid high-risk ventures or
6) Keep track of all debts due and paid to your
creditors. Make sure your credit report is updated for the
7) Sharpen your financial literacy. Robert Kiyosaki,
author of "Rich Dad, Poor Dad" is a strong advocate for
personal fiancial education. You can always pick up
financial literature along the way and think about how you
may change the way you look at your wealth. You never know
how truly rich people think differently about their money
from the rest of us.
As the saying goes, "Time heal all wounds." It will take
years to be a 'normal' person again, but once you know you
have attained the discipline to practice good habits,
there's no reason how you can fall back to the old self. As
you become wiser, you can better inform others about the
unhealthy influences of commercialism and consumerism.
Justin Koh is a freelance writer whose
articles have appear in most major ezines.
You can find more of these at:
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electronically or in print, free of charge,
as long as the bylines are included. A
courtesy copy of your publication would be
Your Credit Report
After Bankruptcy-What To Look For
Do you KNOW what is on your credit report? Even if you
have just filed bankruptcy it is EXTREMELY important that
you KNOW how it is reported on your credit report. It is NOT
the credit reporting agencies responsibility to make sure
that your credit report is accurate. It is YOURS, and only
you can make sure that it is.
After receiving your bankruptcy discharge papers the
first thing you will want to do is get a copy of your credit
report and make sure that the information reported on it is
correct. Did you know that over 90% of the time it is
You wll want to make sure that your report is showing the
date the bankruptcy was filed and when it was discharged.
Make sure that ALL creditors that you included in the
bankruptcy are showing that they were and that your balance
is $0 and nothing else. Profit & Loss or Charge Offs will
lower your credit score. Make sure they report as "included
in bankruptcy" with a $0.00 balance.
If a creditor shows any balance other than $0.00 and it
was included in the bankruptcy it will lower your credit
score. It will by your responsibility to contact the
creditor and have them update your credit report to show the
correct information. Be prepared, you may need to contact
them several times before they get it right. But don't stop
until it is.
Did you also know your credit score will go up after a
bankruptcy? Why? Because all past due, profit & loss and
charge offs will now show a balance of $0 instead of a
balance past due.
Did you know that if your credit score is over 500 you
can purchase a home and get 100% financing? That's right!!
However, you need to realize that you will be paying a
premium price in the closing costs and interest rate. If you
do some credit repair and wait until the bankruptcy is two
years old you can qualify for a Fannie Mae low interest rate
Remember, you are responsible for your own credit report.
No one else is going to care about it as much as you. Start
working on it now, it's never to late.
What You Have To Expect
After Filing For Bankruptcy
Though the ability to get finance doesn’t disappear
completely after a bankruptcy process, there are a lot of
restrictions that applicants have to suffer in order to get
finance. There is a period of time they need to wait before
applying, there are certain loans that they cannot
reasonably expect to obtain and the same goes to certain
financial products that will be out of their reach for a
long period of time.
Getting Finance After Bankruptcy is Feasible?
Truth is that getting finance after bankruptcy is extremely
complicated but not impossible. You can’t apply right away
after your bankruptcy has been discharged; you need to wait
a reasonable period of time that can range from 2 to 10
years depending on the type of loan you are looking for.
There are some loans though, that do not require such long
You also need to start improving your credit score and
history. One thing that may not happen is that you continue
to have delinquencies recorded into your credit report.
After your bankruptcy has been discharged, your credit
history must be impeccable. You need to show to lenders that
you’ve learned the lesson.
Thus, you need to pay all your bills on time and avoid
late or missed payments. Otherwise your credit will get
ruined beyond recovery. You need to understand that
defaulting on a loan or any financial product after
bankruptcy is unacceptable and recovering from such
situation would take you many, many years.
What Kind Of Loans Should You Apply To At the
beginning, you need to be moderate with your expectations.
You can’t pretend to get an unsecured loan with a high loan
amount right away. If you need high amounts, you will only
be able to get approved for a secured loan under the right
circumstances. But when you have just gone through a
bankruptcy process, getting approved for an unsecured loan
for a high amount is not feasible.
The smart thing to do is to apply for a secured credit
card and start repaying your balances on time. This will
contribute greatly to improve your credit score and history
till you are able to get approved for an unsecured credit
card. With the new credit card you need to do the same and
focus on not paying late or miss payments. The continuous
timely payments will raise your credit score and improve
your credit history.
Last, you can request
small unsecured loans or get an account with an
overdraft agreement. Repaying these loans will also improve
your credit history and as time goes by, you’ll be able to
request and get approved for loans with higher amounts and
more complex financial products.