Filing for bankruptcy involves gathering a lot of information together, reading a lot of material, and completing a variety of steps. The primary function of most of this work is to come up with the correct numbers for four specific calculations. What are these calculations? And what do they mean for you? Here’s what you need to know.
1. Dischargeable Debt
Bankruptcy involves the discharge (full release or cancellation) of some or all of your debt. But not all debt can be discharged in bankruptcy. Therefore, it’s vital that you understand how much of your debt can be wiped away and what can’t.
Student loans, for example, are not likely to be dischargeable while most credit card debt can. And tax debt must meet qualifications to be dischargeable. A debtor whose debt is largely student loans may see little helps from Chapter 7 liquidation. And a taxpayer who files too early or too late might not get relief from all their tax debt.
2. The Means Test
The means test is one of the earliest calculations you will complete. This test determines whether or not you qualify for Chapter 7 liquidation. To benefit from the immediate discharge of your debts without future repayment, you must have an income underneath a certain threshold. Otherwise, a high earner could abuse the system by taking discharge when they could repay some or all of those debts over time.
The means test requires you to compile all your sources of income and your obligations. It also provides standard amounts to be deducted for living expenses like food and clothing, medical care, and rent. If your income is low enough — with or without these deductions — you qualify for Chapter 7. If not, you must use Chapter 13 repayment plans.
3. Repayment Plan
If you opt for or must use Chapter 13 bankruptcy, you will need to determine what you can repay each month toward dischargeable debt. To do this, add up your income and subtract any priority debts (such as child support), then any secured debts you will reaffirm, or keep paying. Deduct allowable expenses similar to the means test process. The remaining amount is your disposable income.
The bankruptcy trustee must approve your calculations for disposable income and therefore how much you propose you can repay each month. And at the end of the repayment period (three to five years), the remaining dischargeable debts are wiped off.
4. Exemption Amounts
Finally, there is the number of allowable exemptions for Chapter 7. Exemptions are a list of dollar values of certain assets that you are allowed to keep instead of giving up to pay the debt. Each state and the federal government provide these lists. Common exemptions are allowed for such things as a primary home, vehicles, household goods, tools and equipment, retirement accounts, judgments, and jewelry.
Exemption amounts vary, and you are often allowed a wildcard exemption that can be used to protect any asset up to a dollar amount. Keep in mind when doing these calculations that exemptions are for the equity in items — the difference between what the item is worth and what you owe on a secured loan — rather than its overall value.
As you understand the purpose and makeup of these four calculations, the rest of the bankruptcy process will become more clear. Why? It all leads to these important numbers and stems from them. And the best resource you can have in reaching the right calculations is an experienced bankruptcy attorney in your state.
Wiesner & Frackowiak, LC can help. We can explain and assist you with these and any other bankruptcy questions you have. Call today to make an appointment.