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    Understanding the Means Test in the Bankruptcy Filing Process

    What is a Bankruptcy Means Test?

    A bankruptcy means test is part A-2 of Bankruptcy Form 22. For most people, taking a means test is the first step in filing for Chapter 7 bankruptcy in Tennessee or other states in the United States. It is a complicated process but it is also necessary, as it makes sure that only deserving people are awarded Chapter 7 bankruptcy status. In brief, the means test determines that filers for Chapter 7 bankruptcy do, in fact, need the financial relief that bankruptcy provides.

    Does Everybody Filing for Bankruptcy Have to Complete a Means Test?

    No. If your household monthly income is below the median for a Tennessee family of the same size as yours, you do not have to take the test before you file. And if your debts are not primarily consumer debts—that is, things purchased for consumption by an individual or household—you do not need to complete the means test. In addition, veterans who are disabled and who accrued the debt while serving in the United States forces are also excused from the means test.

    Who Has to Take the Bankruptcy Means Test?

    Anyone with an average household income above the Tennessee median for a similarly sized household must take the bankruptcy means test to determine eligibility for Chapter 7 bankruptcy.

    How is the Average Household Income Calculated?

    The average household income in Tennessee is calculated by taking the total household income over the previous six months and dividing it by 6. After calculating the average monthly income for your household, multiply it by 12 to get the average for the year.

    All forms of income are included in the bankruptcy means test calculation, including wages, income from rental properties, stock and investment dividends, retirement funds, pensions, social security, and any money paid to you by others to help with household expenses.

    Because the cost of living varies depending on where in the United States you live, the means test calculations are based on state rather than national standards. Here are the current Tennessee averages used in test calculation.

    What is the Tennessee Median Household Income?

    This depends on family size and varies from year to year. Samples of the current figures are as follows:

    • Household of 1 person: $40,088.00
    • Household of 2 people: $56,085.00
    • Household of 3 people: $66,252.00
    • Household of 4 people: $77,260.00

    If your income is higher than these average figures, you must complete the Tennessee means test to find out whether you are eligible for Chapter 7 bankruptcy in Tennessee.

    If you have an income that is currently too high but your income fluctuates, it might be a good idea to see if it goes down in the next month or so and recalculate then.

    How Do I Complete the Bankruptcy Means Test?

    The means test is completed by calculating your income minus your expenses. This can be a complicated process, involving the gathering of specific information about your personal finances and supporting documents the court will want to look at. As stated above, your income can come from a variety of places. But you can also offset this income by claiming allowable expenses. These vary depending on the income’s source. For example, allowable expenses for rental properties are different from those allowed for employment. It is also possible for you to reduce the income by including some expenses necessary for medical treatment and other things essential to the health and wellbeing of you and your household. Understanding what can be claimed is difficult and it is wise to take advice from a qualified professional.

    What Happens if I Fail the Bankruptcy Means Test?

    Individuals with too high an income to qualify for Chapter 7 bankruptcy according to the means test can consider filing for Chapter 13 bankruptcy. This option is also sometimes preferable for people with significant assets to protect. An experienced bankruptcy attorney can advise you about this.

    Contact a Professional

    Like so much of what is involved in the process of filing for bankruptcy in the United States, undertaking a means test can be very complex. Employing the services of an experienced bankruptcy attorney can make the process much less confusing.

    The Pope Firm has offices throughout Tennessee and their experienced team of attorneys can help clients understand the Chapter 7 means test process as well as other aspects of bankruptcy proceedings.

    Call today at (865) 324-0456 to learn about our services.

    The Different Types Of Bankruptcy

    Depending on your situation, there are different types, officially known as “chapters” of bankruptcy, that you can file for. These different chapters of bankruptcy provide different results for different cases, and it’s important to have some knowledge on these chapters before filing for bankruptcy.

    Chapter 7 Bankruptcy

    Chapter 7 bankruptcy is a commonly filed for chapter of bankruptcy and is intended for use by low to moderate income individuals with more debt than they’ll ever be able to repay. If properly executed, this chapter of bankruptcy can eliminate most or all of a person’s unsecured debt. If you’re eligible, Chapter 7 could be a great debt relief solution for you.

    Chapter 13 Bankruptcy

    Another great debt relief solution is Chapter 13 bankruptcy, that works great for people that aren’t eligible for chapter 7 bankruptcy. This chapter allows the debtor, or person that has borrowed money, to restructure their payment plans to be more manageable. At the end of this payment plan, most unsecured debts are discharged, or eliminated. This is sure to provide some much-needed breathing room for those people that feel in over their head, and are in need of some debt relief.

    If you need assistance with personal or business bankruptcy and filing in Tennessee, reach out to The Pope Firm and Charles Pope, Attorney At Law.

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    Frequently Asked Questions

    Bankruptcy occurs when an individual, business, or other entity declares the inability to repay its debts. If you file for bankruptcy, that means that debt collectors must pause attempting to collect debts from you. Bankruptcy often allows you to erase most, if not all, of your debts.

    There are two types of debts, unsecured and secured. Some examples of unsecured debts are credit card bills, medical bills, or taxes. Secured debts can include car loans or mortgages, which use the purchased item as collateral. In many cases, filing for bankruptcy can keep this collateral protected and prevent foreclosure of your home or repossession of other assets.

    Bankruptcy is governed by federal legislation under the Bankruptcy Code, which falls under the greater United States Code. Both federal law and local law inform the bankruptcy procedure. Federal bankruptcy judges, appointed by the United States court of appeals, preside over court proceedings in these cases. In court, the judge and a court trustee, review your finances to determine whether or not to discharge the debts at hand.

    Each state has one or more bankruptcy courts. Tennessee has six bankruptcy courts throughout the state.

    Filing for bankruptcy can be a daunting process, and working with a firm with expertise in the field can provide you with necessary guidance.

    There are several types of bankruptcy. Most individuals, married couples, and small businesses choose to file under Chapter 7 or Chapter 13.

    What are the Differences Between Chapter 7 and Chapter 13?

    The primary difference between these two types is that Chapter 7 bankruptcy allows an entity to fully discharge its debts in a short period. A Chapter 13 bankruptcy involves reorganizing debts and creating a plan to repay those debts over an allotted time. After that time, Chapter 13 eliminates most of the remaining debts.

    Chapter 7 bankruptcy is typically filed by those with very limited income and unsecured debts, the most common of which is medical bills. Chapter 13 bankruptcy is most often filed by higher income bracket individuals and those with more assets, such as a car or a home. The motivation for filing Chapter 13 bankruptcy is often preventing assets from being repossessed or home foreclosure due to outstanding debts.

    What Other Types of Bankruptcy Are There?

    Two other types of bankruptcy are Chapter 11 and Chapter 12.

    Chapter 11 primarily applies to larger companies and corporations, but sometimes it is the right choice for small businesses as well. Chapter 12 applies to those who are considered family farmers.

    Various considerations get factored into who should file bankruptcy. Filing bankruptcy may be the right choice for you if you are overwhelmed by debt. Regardless of what type of bankruptcy you file, as soon as the process begins, you are granted an automatic stay. A stay is an injunction that prevents creditors from collecting any debts for an allotted time. An automatic stay halts the process of, for example, foreclosing on a home or repossessing a vehicle.

    A Chapter 7 bankruptcy will discharge most of your debts. Filing Chapter 7 is appropriate for those who make less than the median household income in Tennessee and whose assets would not be at risk. In this situation, your non-exempt property is sold to pay off creditors.

    Chapter 13 bankruptcy allows you to create a plan to repay your debts. If you have non-exempt property used as collateral in secured loans, you can restructure your finances to pay off any relevant debts over the next three to five years. Chapter 11 functions in a similar way, but is exclusively for businesses.

    Filing for bankruptcy can provide a fresh start for those bogged down with debt, either by restructuring finances or discharging debts entirely.

    How bankruptcy affects business depends upon the type of bankruptcy filed.

    Chapter 11

    Businesses classified as corporations, partnerships, or LLCs can file Chapter 11 bankruptcy. Chapter 11 allows for debt restructuring, while the business stays open. As in Chapter 7 and Chapter 13, an automatic stay activates as soon as your bankruptcy period begins. In an automatic stay, creditors cannot try to collect money or other assets from you.

    During this period, you work with your lawyer to restructure your debts and develop a plan to get your business back on track. This plan must be approved by some of your creditors and a bankruptcy court to go forward. You will be able to repay your debts over several years.

    Chapter 7

    Filing Chapter 7 bankruptcy discharges all of your business’s debts by liquidating your assets. The entire process can be completed quickly, often in several months. Chapter 7 allows for the discharge of most debts, excluding government taxes and fines.

    Chapter 13

    Only individuals can file for Chapter 13 bankruptcy. Thus, although businesses cannot file, you can file Chapter 13 as the sole proprietor of your business.

    When you decide to begin the bankruptcy process, the first step is to find a lawyer who is an expert in filing bankruptcy in Tennessee. Hiring a bankruptcy lawyer can indeed be expensive, but it is worth the cost. This professional can guide you through what type of bankruptcy is best for your situation and what to expect throughout the process.

    • Collect your documents: It is important to have everything from your paystubs to your credit report available before starting.
    • Take the means test. This test will determine if you are eligible for Chapter 7 bankruptcy and help guide you in making a repayment plan for Chapter 13 bankruptcy.
    • Meet with a credit counselor. In the state of Tennessee, most individuals must meet with a credit counselor from an approved provider before filing for bankruptcy.
    • Fill out bankruptcy forms. If working with a lawyer, you can expect they will use online programs to help you file your paperwork.
    • Pay your filing fee. It costs $335 to file for bankruptcy in Tennessee. Waiver of the fee is possible in some cases, but it is uncommon. However, it is possible to pay the fee in several installments instead of the entire balance upfront.

    Declaring bankruptcy wipes out many debts, but not all.

    What Debts are Usually Covered by Bankruptcy?

    Bankruptcy can clear most unsecured debts, including:

    • Credit card bills
    • Medical bills
    • Overdue utility payments

    Bankruptcy can also clear many secured debts, but it depends on whether you file for Chapter 7 or Chapter 13 bankruptcy. For Chapter 7, you will have to give up any non-exempt items you put up for collateral. For Chapter 13, they will become part of your repayment plan.

    What Debts Are Not Covered by Bankruptcy?

    • Child support
    • Alimony obligations
    • Those related to personal injury or death in a drunk driving case
    • Any debts not listed on your bankruptcy papers

    No type of bankruptcy covers these debts. If you file for Chapter 7, they remain outstanding. Under Chapter 13, you pay these debts along with your other debts.

    What Debts May Be Covered?

    Bankruptcy rarely covers student loan debt. However, it may be in some cases with proof of undue hardship.

    Tax debt is also rarely covered, but bankruptcy may cover certain old unpaid taxes.