If you are giving some thought to filing for bankruptcy, you may be wondering about the bankruptcy means test, and what it means and entails. Essentially, the bankruptcy means test determines whether you will be able to move forward with a Chapter 7 bankruptcy, if preferable, or if your only option is to file for Chapter 13 bankruptcy.
There are benefits and drawbacks associated with both types of bankruptcy filings, but determining which bankruptcy process to follow is an important first step in regaining control over your finances.
What the bankruptcy means test involves
If you undergo a bankruptcy means test, the first step involves determining whether your household income over the last six months falls below the median income in place in Mississippi. If you have lost or taken on a new job within the last six months, you can expect that the income changes will factor in when determining whether you can proceed with a Chapter 7 bankruptcy. If your income falls below the median threshold in place in Mississippi, you automatically pass the test and can move on with your Chapter 7 filing.
If you do not pass the means test during the first step, the second step involves gathering documentation regarding all expenses you had in the last six months. Once you take into account expenditures for food, rent, medical bills and so on, any money left over is disposable income that you should reasonably be able to put toward your debt. If your amount of disposable income is below a particular level, you may still be able to proceed with a Chapter 7 bankruptcy.
If you really want to file for Chapter 7 bankruptcy but you do not pass the means test, you may wait six months and then try again. If you cannot wait another six months to file, your best bet may be to proceed with a Chapter 13 bankruptcy.
Filing for bankruptcy in Mississippi is typically a difficult decision with plenty of forethought. However, filing bankruptcy can also be a financial silver lining to much of the stress and gloom that may have permeated the filing person’s life.
As explained by the Mississippi Bar, two main options Mississippi residents have when deciding to file for bankruptcy are the Chapter 7 and the Chapter 13 bankruptcy filing. The former is when the person agrees to liquidate assets to help pay the debts while the latter involves a payment plan to pay off the debts, usually at a lower amount.
Chapter 13 benefits
One benefit of a Chapter 13 that is not available under Chapter 7 is that if the filing debtor had a cosigner on any of the debt, that cosigner may be able to receive protection under the Chapter 13 filing. In addition, gaining credit back may be easier in some instances because the creditor who sees the Chapter 13 filing on the debtor’s credit report will understand that the debtor paid more of the debt back than if there was a Chapter 7 filing.
Chapter 13 eligibility factors
To be eligible for a Chapter 13 bankruptcy discharge, the filing person must have less than a quarter of a million dollars in unsecured debt. Unsecured debt includes that derived from credit card use and medical bills.
There must also be less than three-quarters of a million owed on the secured debt. Secured debt includes such loans as a home mortgage and an auto loan.
The filing debtor must have a reasonably steady income that indicates he or she can likely pay at least part of the debts in a three-to-five-year period. If the debtor has no income, he or she will likely not be able to successfully file for a Chapter 13.
Payment plan
Essentially, the filing person will propose a payment plan that uses his or her disposable income each month to pay creditors. As noted, the duration of the payment plan is typically between three and five years. Disposable income includes that which remains after the debtor satisfies basic living requirements, such as food, housing and other necessary bills.
On the down side, Chapter 13 has a higher failure rate because sometimes the debtor finds he or she is unable to fulfill the payment plan.
All types of debt could be weighing you down: credit card bills, medical payments, student loans and mortgage payments, to name a few. To avoid bankruptcy or to keep your house during bankruptcy, one option you might want to consider exploring is mortgage modifications. Are they relatively easy to get, or is being granted one a rarity?
The good news is that many people easily get a mortgage modification, but as with anything, such a move can come with downsides.
Pros and cons of a mortgage modification
The disadvantages of a mortgage modification include your mortgage possibly being reset for a 40-year period, meaning that if you had, say, 18 years’ worth of payments left, you may turn out to have 40 years’ worth at the end. Your credit score might also take a hit, although not as bad as a foreclosure mark.
The advantages include a lower monthly payment, especially for the first few years, and such a modification can help get you through a distressing time in your life. You can file for bankruptcy, and through this reorganized debt plan be able to stay in your house.
Ease of getting one
Now to the heart of the matter: Who can most easily get a modification? Generally, those who qualify show financial hardship yet demonstrate sufficient income to make the new payments. Hardship examples could be illness, death of a spouse or job loss. Applicants must be behind on their payments or about to become behind. If you are seeking a modification in bankruptcy, the fact that many of your debts are being eliminated or reorganized should show you have some increased capacity to make payments.
Some lenders have their own departments and programs for loan modification, so you can check online on your lender’s website or contact it to find out. Otherwise, there are programs such as Freddie Mac Flex Modification that may be able to help. Also, if you have no hardship to show to your lenders, they may offer you a refinance since you might not qualify for a modification.
For many people struggling under the weight of tremendous debt, bankruptcy makes good sense. For example, Chapter 7 can wipe out unsecured debts such as credit cards and medical bills. Chapter 13 reorganizes debt so it is more manageable to pay. However, there are some cases in which bankruptcy may not make sense, such as:
If all or most of the debt is not dischargeable
Not every type of debt is treated equally in bankruptcy. For one thing, it is possible for credit card bills to be wiped out, but most student loans and tax obligations must remain. So, if all your debt is due to IRS and student loan payments, bankruptcy may not make sense. Of course, it is possible you may be able to meet student loan undue hardship standards, so it never hurts to meet with a lawyer. There are also some exceptions to the IRS rule.
Other debts that remain in bankruptcy include child and spousal support payments and court-ordered payments from a criminal case.
When much of the debt is dischargeable
The good news is that many types of debt are dischargeable in a Mississippi bankruptcy, and you are able to keep assets such as retirement accounts. Your disability income and personal injury proceeds (up to $10,000 for the latter) are also protected. You are allowed to keep $10,000 worth of personal property, and for many people, that means being able to retain a car and all their savings. Equity in your house is protected, too, up to $75,000.
So, with a single bankruptcy filing, you can either wipe out or consolidate crippling credit card bills and medical bills. In such cases, bankruptcy can make a lot of sense.
Alternatives
If it does not make sense to file, or if you have some dischargeable debt mixed with non-dischargeable debts, it helps to be aware of bankruptcy alternatives. They include credit counseling and other types of debt consolidation.
The health care costs and insurance issue in the United States impacts not only the health of Mississippi residents, but often their financial stability. Medical debt is a top cause of personal bankruptcy filings.
Long gone may be the days when filing for bankruptcy was shameful or a sign of a financially irresponsible person or couple. An expensive medical situation a responsible person handles in the best possible way can land him or her in huge medical debt.
Medical debt is the leading cause of bankruptcy
As reported by USA Today, the Kaiser Family Foundation reports that the leading cause of personal bankruptcies is unpaid medical bills that turn into large debts. In 2014, about four out of 10 Americans incurred debt from a medical problem.
One might expect that this would primarily be a problem for the uninsured. However, Kaiser notes that of the 25 percent of Americans who have difficulty paying medical bills, among them are those who buy health insurance independently and those who receive group health insurance through their jobs.
Many try to solve the problem by using savings or retirement to pay debt, or by getting an additional part-time job. With today’s high-deductible medical insurance policies and those with high co-pays and coinsurance, CNBC confirms that having health insurance is not insurance against huge medical debt.
Medical debt leads to other debt and skimping on necessities
In fact, medical debt often causes substantial credit card debt. Millions of people use credit cards to cover growing medical bills and buy themselves time. The high credit card interest then causes the credit card debt to grow, and often it becomes insurmountable.
Thus, a bankruptcy that includes a lot of credit card debt may, in reality, be a medical debt bankruptcy. It may also be ironic that many people skimp on prescriptions or even more expensive healthier food to attempt to pay at least something towards their medical debt.
Personal bankruptcy can be the most effective and legal method to get that fresh start without crushing medical debt. It creates a beginning point to gain back one’s control and choices in life.
