As Incomes Drop, Lower Median Income Figures May Lead to More Chapter 13 Filings

Making it harder for overburdened debtors to file bankruptcy in the middle of our biggest financial crisis in living memory may not be the best policy idea to come down the beltway, but it is exactly what Congress set in motion in 2005. Here is why:

If you have been looking into filing bankruptcy, then you have heard about the 'Means Test'. The Means Test was created by Congress to determine eligibility for consumer bankruptcy in 2005 when it reformed the Bankruptcy Law. The idea was that a debtor should only get as much bankruptcy relief as he or she really needed. So Congress developed a formula to determine which bankruptcy filers would qualify for Chapter 7, which offers an immediate discharge of debt, and who should file Chapter 13, which requires a lengthier payment plan.

Along with its creation of the means test in 2005, Congress provided for automatic updates of state median incomes, upon which the means test is based. The state median income figures are periodically updated by the U.S. Census and the Executive Office for U.S. Trustees (EOUST) publishes a table that is used in the bankruptcy courts.

As more workers lose their jobs, the median income, unsurprising, can drop as well. If the median income figures for a state drops, it lowers the bar for debtors who will be subjected to the means test and the possibility of being denied help in Chapter 7 bankruptcy. In North Carolina, the unemployment rate rose to 10.8% according to the US Dept of Labor figures reported for August 2009. Similarly, the post-November 1 EOUST table, cites the median annual income in North Carolina for a family of three fell by several thousand dollars. The irony is that even though the number of people needing bankruptcy has risen, the means test makes it more difficult for them to qualify for Chapter 7.

None of this news should discourage you from seeking bankruptcy relief. Even if you are one of the small percentage of people who don't qualify for a Chapter 7 bankruptcy, Chapter 13 has essentially the same effect of a Chapter 7- a discharge of your unsecured debt. Additionally, some means test deductions which are not available in a Chapter 7 are available as disposable monthly income deductions in Chapter 13. The Chapter 13 disposable monthly income test measures how much disposable monthly income you must devote to your Chapter 13 payment plan. Even if you are deemed to have substantial disposable monthly income, some pre-petition planning will help bring the number down. As always, talk to an experienced bankruptcy about your options, you'll be amazed at how beneficial a a properly planned bankruptcy can be.

In North Carolina, contact the Law Offices of John T. Orcutt. Call +1-833-627-0115 for a free initial debt consultation. Or visit www.billsbills.com to fill out a free and confidential debt questionnaire.