Means test introduced in new federal bankruptcy laws
The number of individuals filing bankruptcy has increased manifold. The same holds true even for the corporate houses. Filing bankruptcy always sends negative signals and is associated with a social stigma. Earlier filing bankruptcy was easy. The new federal bankruptcy laws that were introduced on 17th October 2005 have changed the way you file bankruptcy. Several changes have been implemented and one of the changes introduced was the Means test.
You undergo a means test to find out if you are the right candidate for Chapter 7 bankruptcy. Means test has been made mandatory for consumers filing bankruptcy. This is not applicable for business debts.
In means test, your income is compared to the median income of a similar household as yours and in the state in which you dwell. If it is found that your income is lower than the state median income, you qualify for Chapter 7 bankruptcy. Your income has to be low enough to help you qualify for Chapter 7 bankruptcy. However, it doesn’t mean that you have to be cash strapped to file Chapter 7 bankruptcy. It can that your income is good but you have too many expenses to meet.
The new federal bankruptcy laws introduced means test so that the debtors genuinely in need of filing Chapter 7 bankruptcy could do so. It could very strategically eliminate debtors that didn’t qualify for Chapter 7 bankruptcy.
If you happen to qualify for Chapter 7 bankruptcy, a court appointed trustee takes the responsibility of paying off your creditors. All your non-exempt assets are liquidated so that the proceeds of the same can be used to clear all your debts. You can also enjoy exemption that can be either state exemption or federal exemption.
In addition to the means test, the new federal bankruptcy laws also introduced credit counseling. It has made pre bankruptcy briefings mandatory. Prior to filing bankruptcy, you need to attend a credit counseling session. The credit counselors have to be approved by the government.
The new federal bankruptcy laws were introduced so that the number of debtors filing bankruptcy reduces. However, reports suggest that following recession, the number of consumers filing bankruptcy has increased several times.
Filing bankruptcy damages your credit rating to a great extent. It stays on your credit report for a period of 7 to 10 years. It also prevents you from availing fresh credit on favorable terms.