The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (aka BAPCPA), not only has a misleading name, but makes many employed middle-income consumers ineligible for a Chapter 7 bankruptcy.
The eligibility rules redefine “current income” as any income received by the debtor during the previous six months, except Social Security benefits, which are ignored. This so-called “current income” is then compared to the median income, state by state, county by county, based on the number of persons in the household. Debtors whose income is higher than the county’s median income will only qualify for a Chapter 7 if they pass the “means test.”
Under BAPCPA the “means test” uses IRS National Standard Expenses to determine “reasonable living expenses” for the debtor’s household, and ignores actual living expenses and the needs of the household members. The IRS living expenses are laughably unrealistic, and leave many employed households with little funds for food, transportation and rent.
Mortgage payments (or rent) are the biggest expense for most households, second only to taxes. The IRS has an interesting way of defining taxpayers’ needs. The “housing and utilities allowance” lumps together the monthly mortgage payment or rent with homeowner’s insurance, property taxes, electricity, natural gas, water & sewer, and telephone. For a Clackamas County household with one member this allowance is only $1295 per month. A household of five is allowed $1934. This figure ignores the fact that Oregon homeowners pay close to the highest property taxes in the nation.
If you fail the means test, you have the option of filing a Chapter 13 bankruptcy, wherein you make payments to the bankruptcy trustee for a minimum of 3 years and a maximum of 5 years. The amount you will pay in will usually be calculated as follows: Your take-home pay (including any Social Security, public assistance, child & spousal support), minus your “reasonable” living expenses produces the “excess” income figure that will be your monthly Chapter 13 payment.
This is a very brief explanation of how one qualifies for either a Chapter 7 or a Chapter 13. If you qualify for one, you do not quality for the other. Notice that this qualification process does not take into account your debt picture or your asset picture. Only a comprehensive consultation with an attorney will help you decide if bankruptcy is right for you.