Chapter 7 Bankruptcy

To find out whether you will be required to make repayments after bankruptcy, there is a means test (a test of ability to repay) which goes like this:

Step 1. Start with your income

Step 2. Subtract your necessary obligations. For instance:

• If you own a house, deduct the amount of your monthly payment.
• If you rent your residence, deduct the cost of your rent. The amount of utilities and related costs will be determined from a schedule of current local rents for a family the size of your family rather than what you actually pay.
• Car payments
• Alimony
• Child support
• Back taxes
• To learn more, see What Types Of Debt Are Not Dischargeable in Bankruptcy.

Step 3. Deduct an allowance set by the IRS for other expenses -- not your real expenses.

• The amount of utilities and related costs will be determined from a schedule of current local rents for a family the size of your family rather than what you actually pay.
• With respect to your car, the IRS sets the budget for maintenance, fuel and insurance costs based on where you live and the number of vehicles you own.
• An allocation for food, clothes and other personal items is based on national averages.

Step 4. Determine what you can repay over what period of time.

• If you can repay $10,000 over 60 months (5 years), or 25% of your debts -- whichever is less, though not less than $6,000), then you cannot file Chapter 7 bankruptcy. You must file under Chapter 13 Bankruptcy which, as you will see, means you will continue to pay creditors -- even though it will be a lesser amount.
• If the amount you have left is less than these amounts, then your debts can be discharged completely in Chapter 7 -- after you complete a debtor education course. As a rule, pre-bankruptcy credit counseling and pre-discharge debtor education may not be provided at the same time. Credit counseling must take place before you file for bankruptcy; debtor education must take place after you file. To protect against fraud, the certificates are produced through a central automated system and are numbered.
• To learn more, see Post-Bankruptcy Counseling

Chapter 7 bankruptcy can only be discharged once every eight years and remains on the credit report for a period of ten years.

Debts that you incur after filing for bankruptcy are not discharged in bankruptcy. You will still have to pay them.

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