The determining factor as to whether or not the means test should be applied to any particular case relates to the filer’s income over the preceding six moth period before the case is filed with the bankruptcy court. This is quite deliberate as it prevents many people from claiming bankruptcy until they are facing utter destitution, which more or less defeats the overall purpose of bankruptcy protection in the first place. Regardless of the current state of affairs, the filer’s income over the previous six months is now effectively held against them, meaning that just to qualify for Chapter 7, many debtors are more or less obligated to go through half a year of extreme financial difficulty.

As is the case with all aspects of the Bankruptcy Code (U.S.C. Title 11), the means test is a very complicated process involving three distinct steps. The first of which is to compare the debtor’s income over the previous six months with the median income of the state in which they live. If the debtor’s income over the preceding six months is above the state’s median income – regardless of the debtor’s current situation – then Chapter 7 bankruptcy is automatically denied to the debtor though Chapter 13 bankruptcy may still be available.

If the debtor’s income was below the state median income, then the second phase of calculations comes into play. This phase takes the debtor’s income and then subtracts a number of predetermined living expenses in order to determine the filer’s discretionary income. The discretionary income is then multiplied by sixty, representing the sixty monthly payments of a five year Chapter 13 debt restructuring plan. If this discretionary income exceeds $10,000, or $166 per month, then Chapter 7 bankruptcy is denied and the debtor is told to use Chapter 13 instead. The problem with this is that the list of living expenses is extremely biased against the debtor, so this formulation rarely reflects the debtor’s actual discretionary income. Further, the expenses also exclude all of the debtor’s debt payments, even ones that cannot be discharged or restructured through bankruptcy.

After this there is a third calculation based on the discretionary income determined in the second calculation. However, as noted above, that calculation is very misleading in many cases, making the third one improper as well. The ultimate purpose is to make it extremely difficult for people to use bankruptcy as it was meant to be used: as a safety net to prevent people from falling into extreme poverty. Instead, the means test does the opposite, essentially forcing someone to go into extreme poverty before they can even file for protection.

The basic idea is that the debtor lists all of his or her property, assets, and income and then lists all of their debts and liabilities. The court exempts the basic possessions needed for life and making a living and the remainder of the debtor’s property is liquidated through an auction. The funds received from the liquidation are used to pay off the creditors (at least in part and in a prioritized sequence) and the remainder of the debt is discharged, or essentially written off by the court. Although this very simple description covers the basics, in reality it is all vastly more complicated which is why bankruptcy law is a legitimate specialization within the legal profession.

The property that is deemed exempt from liquidation under Chapter 7 bankruptcy includes ones home, basic furniture and appliances, clothes, and other necessities for day-to-day life. Similarly, basic items needed by the individual to make a living – like tools or a vehicle – may also be exempt. What can be exempted differs by state and is one of those areas where having an attorney is extremely helpful. Needless to say, exempted items that secure debts – like a house with a mortgage or car still being paid on – may be exempt from liquidation but is not exempt from creditors and Chapter 7 bankruptcy cannot discharge the amounts owed on secured debts like this.

It is also important to note that Chapter 7 bankruptcy cannot discharge many other kinds of debts beyond secured loans (like a house mortgage or car payments). Section 523(a) of the bankruptcy code spells out a broad list of kinds of debts that cannot be discharged, and this should be reviewed before filing for bankruptcy in the first place. After all, if the debts in question cannot be discharged through Chapter 7 bankruptcy, it is pointless to file for it. These kinds of debt include, but are not limited to: (a) any sort of tax liability (federal, state or local); (b) any debt that is not specifically listed in the relevant schedule of the bankruptcy filing; (c) child support or alimony; (d) any sort of fees or fines or compensation ordered b y a court for criminal conduct; (e) any sort of debt owed to the government or any government agency or service (like student loans); (f) debts owed to certain tax-advantaged retirement arrangements (401(k)s or pension plans); and others.

Since 2005, a number of more stringent policies and practices have been mandated in Chapter 7 proceedings as well, making it more difficult to file and more difficult to have debt fully discharged. Chapter 7 bankruptcy can be a very good option in some circumstances, but may not be in others. It all comes down to the debtor’s individual circumstances and situation.

If you are still receiving a fairly dependable income and still have some assets and holdings, then there are more options available such as debt settlement, debt consolidation, and so on. Of course in this case it may actually make more sense to aim for a Chapter 13 bankruptcy then to deal with all of the tricky negotiation that is involved in debt settlement and similar arrangements. Essentially, for any lender to agree to debt settlement and similar arrangements the lender has to believe that agreeing to such terms is better than the alternative. Therefore, as long as you have a degree of income and some assets, the lenders are much less likely to agree to such proposals. This is, in fact, precisely when most people should consider bankruptcy, though there are a decent range of alternatives available.

If, on the other hand, you are already facing extreme financial hardship – due to a dramatic decrease in household income (as comes from unemployment) or a dramatic increase in financial liabilities (as happens with adjustable mortgages) – then the alternatives to bankruptcy have more appeal to the lenders. In this case, the lenders are already very concerned that you are likely to file for bankruptcy, in which case they want to agree to terms that will see them get more than would be given them by a bankruptcy court. Bear in mind that this is only true insofar as unsecured debt is concerned; secured debt (like a home mortgage or car payment) cannot be discharged by Chapter 7 bankruptcy without surrendering the underlying asset. So, as a consequence, unsecured lenders will be far more receptive to debt settlement or modification proposals than secured lenders will be.

As anyone that has ever dealt with a Chapter 13 bankruptcy restructuring agreement knows, personal finances can be very complicated. Therefore there is no “one size fits all” advice that makes sense for everyone. A lot of your personal options are tied directly to your personal circumstances; therefore one of the best ideas would be to have a personal finance expert review your overall situation and offer advice on how to proceed. Before you can even file for bankruptcy there is a legal requirement to under go credit counseling through a government approved credit counseling service. These credit counseling services are recognized by the government and have a specific mandate to look for viable alternatives to bankruptcy where possible. As a consequence, undergoing this credit counseling – which is required to file for bankruptcy anyway – may offer you the best alternatives.

While anyone has the right to file for bankruptcy by themselves without legal representation, in general this is a terrible idea. Bankruptcy law is extremely complex and extremely technical, involving very specific steps that have to be done in a very specific sequence. Any mistake, from an accidental omission to a simple oversight of a document submission can result in very serious consequences. Failure to list an item for example may result in that item not being exempted though it qualified for exemption; or just as easily may be viewed as a deliberate effort to “hide” the asset from the court opening the filer up to sanctions from the court and/or having their case dismissed out of hand. Bankruptcy law is a specialized legal field which represents its own specialist niche in the legal field and this specialization is justified in view of the complexity of the process.

Further, the Bankruptcy Abuse Prevention and Consumer Protection Act, which was completely written by the commercial lending industry and implemented as law in 2005, mandates a number of even tighter restrictions on leeway afforded the bankruptcy judges. Many small mistakes that might have been forgiven by a sympathetic judge in the past now result in an immediate dismissal of the case. On top of this, depending on how far the case had proceeded before it was dismissed, the debtor may lose the right to re-file, leaving them with no recourse to the bankruptcy courts at all. Therefore, even a small accidental oversight can result in a calamity if the person filing pro se does not know what they are doing.

Obviously anyone considering filing for bankruptcy is already hard pressed financially, so hiring an attorney may not seem like a good investment, but this is only true in the most basic of cases. If the debtor has an extremely simple situation – no cash, no assets – then they may be able to file on their own without too many problems. However, for anyone that owns a home, has items to exempt from liquidation, has an income, or even considering a Chapter 13 bankruptcy; getting legal representation is well worth the effort. Depending on how dire the borrower’s situation is, they may qualify for free legal counsel from a number of charitable legal aid organizations. The bankruptcy courts themselves strongly advise that all filers have legal representation and provide resources on where to look for free legal assistance on their website (www.uscourts.gov > FederalCourts > Bankruptcy > BankruptcyResources > FilingBankruptcyWithoutAttorney).

In the United States, all bankruptcy filing fall under federal law and the federal government offers six different varieties of bankruptcy. However, of these the overwhelming majority of personal filings are either Chapter 7 or Chapter 13 bankruptcies, while the majority of business filings are either Chapter 7 or Chapter 11 bankruptcies. The remaining options are less commonly used, but still available to qualifying people and entities.

Basic, or “straight”, bankruptcy refers to Chapter 7 bankruptcy. This is where a debtor’s non-exempt assets are liquidated and the proceeds given to the creditors while the remaining debt is largely discharged. This is what most people think of when they think of bankruptcy in general. Most personal property that is necessary for living and making a living (employment) is exempted from liquidation. This is by far the most common form of bankruptcy filed and also the least expensive and simplest option available. Although it remains the most common option, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 has made it more difficult to file for and taken away many of the benefits of this form of bankruptcy.

Chapter 13 bankruptcies are the more popular option for people with a lot of assets that would not be exempted from liquidation under a Chapter 7 bankruptcy. It typically only applies to professional people with a steady income, which is why it is frequently called “Wage Earner Bankruptcy”. No debt is actually discharged under a Chapter 13 bankruptcy; instead the court implements a strict debt restructuring agreement. Under this agreement, the creditors are forbidden from collection efforts outside of the agreed to terms of the Chapter 13 debt restructuring. However, should the debtor fail to meet his or her obligations under the Chapter 13 restructuring, the whole plan is usually thrown out and the creditors are allowed to pursue the debtor.

Chapter 11 bankruptcy is best known as “corporate bankruptcy” and primarily amounts to a comprehensive reorganization of the entire bankrupt entity. This option is most popular for large corporations since it allows them to continue operating while allowing the courts to design a workable debt repayment scheme to be followed. Some individuals, especially those with large numbers of debts and assets and complex investments, also file Chapter 11 bankruptcy. Such reorganization schemes tend to be very expensive and complex, so the only individuals dealing with this form of bankruptcy tend to be high net worth ones (people with more than a $1 million in investable financial assets, excluding real estate).

The three types of bankruptcy described above account for more than eighty percent of American bankruptcies, but there are other forms as well:

Chapter 12 bankruptcy is a special form of personal bankruptcy that is allowed to family farmers and fishermen in the United States. Though the qualifications are tighter, the benefits are also better for the bankrupt farmer or fisherman under a Chapter 12 bankruptcy.

Chapter 15 bankruptcy primarily deals with foreign, or non-U.S., debtors that owe money in the country. Primarily this is used for American branches of foreign corporations or financial entities (banks, insurance companies, et cetera). These can be extremely complex cases since frequently international treaty law comes into play.

Chapter 9 bankruptcy applies solely to American municipalities – local, city, or county governments that go bankrupt. As an internal government matter, the average person has little, if anything, to do with Chapter 9 bankruptcy.