The Bankruptcy Code (Title 11 of the U.S.C.) is well known for extreme complexity and staunch adherence to process. As such, bankruptcy law represents a legal specialization that even many other types of attorneys are not really qualified to deal with. Further, the courts are generally unforgiving of mistakes that result in wasting their time, even relatively minor omissions or failure to file all the requisite documents in the proper sequence. Worse still, since so many people try to hide assets or use bankruptcy unethically, the courts are much more likely to automatically assume that any particular mistake or omission is intentional and more likely to respond accordingly. In fact, each of the federal bankruptcy court’s websites specifically says as much and strongly advises all filers to use an attorney.

The only people that should even consider filing without an attorney are really people that have little or nothing to lose either way. If you have no assets, no cash, and no income then there is really little to lose and the filing process should be extremely simple. One of the places where many pro se filers get themselves in the most trouble is with the properly claiming their exemptions, but of course this does not matter for someone without any assets to claim as exempt. However, pretty much anyone else – and especially those with any sort of complex holdings like real estate – should certainly use an attorney in order to guarantee that their exemptions are claimed properly and claimed against all creditors.

Another area where many pro se filers get themselves in trouble is with listing all of their creditors. There is a set process to exempt particular creditors, but simply omitting them from the filing is an extremely bad idea that many pro se filers seem to do. Not only does this mean that the excluded lenders still have a full range of collection options available to them, but there is also a very distinct possibility that the court will believe the omission was deliberate in order to misrepresent the filer’s actual financial position. Again, an attorney knows how to file the proper paperwork in order to exclude – with limits – some creditors in a way that the court understands and appreciates as opposed to ad hoc measures taken by non-professionals trying to be clever.

To conclude, officially it is not really necessary to have an attorney for an individual filing for personal bankruptcy. However, realistically speaking, it is a good idea to have one for anyone that has a significant number of assets, money laid aside, real estate or equity, and/or a regular income. Pro se filing is only really a good idea for people with virtually nothing to lose.

Since 2005 it has been a legal requirement for anyone filing for bankruptcy protection to first receive credit counselling from a government approved credit counselling agency. While this reform has been very unpopular since it requires the debtor to pay extra money before they even have the option of filing it is also quite helpful. Since most of the credit counselling agencies that are able to issue the requisite ticket are non-profit organizations, they are fairly unbiased and will review the individual’s current financial situation in close detail to determine whether or not bankruptcy is the right way to go. Therefore, since this counselling is required anyway, it serves as a good way to help an individual determine if bankruptcy is the best option under the circumstances.

People considering bankruptcy should also keep in mind that there are two different types of bankruptcy that apply to most individuals as well: Chapter 7 and Chapter 13. Chapter 7 bankruptcy is the type of bankruptcy that most people think of first, where their non-exempt property is liquidated to pay some of the creditors and the rest of the debt is discharged. This may or may not be the best course of action, but is usually most applicable to people with fairly simple financial situations, extremely limited income, and few solid assets. 

Chapter 13 bankruptcy is more complicated and essentially results in a court ordered restructuring of the debtor’s liabilities, which are all paid off over the span of the three to five year Chapter 13 repayment plan. In many cases, Chapter 13 makes much more sense, especially if the debtor has significant assets and a regular income. Although Chapter 13 bankruptcy remains on the debtor’s credit report for a full ten years like Chapter 7 bankruptcy, it also tends to look better to most lenders since most of the actual debt should be paid in full through the Chapter 13 process.  

There are definitely times when bankruptcy is by far the best option for a debtor, but there are others when this might not be the case. Further, since few things look worse than a bankruptcy on someone’s credit report, it is a decision that should not be taken lightly. The mandatory credit counselling that has to be taken before filing should serve as a helpful measure to see if the bankruptcy is a proper fit or not.

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 core purpose of bankruptcy in general – including Chapter 7 bankruptcy – was to provide debtors with a degree of protection for a while in order to help them avoid utter destitution. However, since bankruptcy has a strongly negative social connotation in the United States, many people fail to file for Chapter 7 bankruptcy until it is already too late. This, needless to say, more or less defeats the purpose.

The basic idea is that all of the debtor’s property – except the various types of property that are specifically exempted, usually property needed to maintain life and employment – is liquidated and the funds are used to pay creditors. Then, the remaining debt is discharged, or essentially erased by the court. Plainly it is all considerably more complex than this, but this is the general idea behind a Chapter 7 bankruptcy. The nuances, however, can be extremely complicated and though a person can file for Chapter 7 bankruptcy by themselves, it is generally advisable to have a bankruptcy attorney if the debtor has any property to lose.

All bankruptcy in the United States is essentially a bureaucratic affair that involves making a number of separate filings with the court in the proper sequence and including the appropriate information. Although this may sound simple, in reality it can be very complicated and the penalty for accidently omitting something, filling out the form incorrectly, or failing to provide everything in the proper sequence can be financially disastrous.  Bankruptcy law represents a specialized niche within the legal profession and even other attorneys may not have the appropriate experience to file a bankruptcy case. Of course, if the debtor has absolutely nothing to lose – as is frequently the case – filing “pro se” may be a viable option.

In 2005 the government passed the Bankruptcy Abuse Prevention and Consumer Protection Act (or BAPCPA), which was written by the institutional lending industry and was specifically designed to make bankruptcy more complicated, more expensive, more time consuming and to reduce the potential benefits of filing for Chapter 7 bankruptcy. However, after the collapse of the real estate market and the subsequent credit crunch and recession, the number of bankruptcies skyrocketed despite the BAPCPA. The BAPCPA has radically altered what is required for Chapter 7 bankruptcy and what the courts are allowed to do and this is another reason why it may be very helpful to have a qualified attorney available. All said, this law has made bankruptcy much more difficult and significantly undermined its utility.

Prior to the passing of BAPCPA, Chapter 7 bankruptcy served as an excellent safety net for debtors that suddenly faced a major financial disaster. That is, indebted people that suddenly lost a job, had a medical emergency, or some other financial hardship could file for bankruptcy protection before they were utterly destitute as something as a preventive measure. This, in fact, is a large part of the entire purpose of bankruptcy, to help people facing default avoid utter destitution. However, the means test somewhat changes this dynamic because it looks at the filers income over the last six months, which means that the debtor would have to be in significant financial difficulty for at least half a year prior to filing.

The means test involves looking at the filer’s average income for the preceding six months and then comparing this to the median income of the state in which the debtor lives. This is done by averaging the previous six month’s income and then doubling it to produce an estimated annual income. This estimated annual income is then compared against the state’s median income for a person meeting the debtor’s specifics (single, married, etc.). if the debtor’s prior income is above the state’s median, then Chapter 7 bankruptcy is denied out of hand, though Chapter 13 bankruptcy may still be available. If the debtor’s income was below the state’s median, than Chapter 7 remains an option until the next phase of calculations.

The next part of the means test takes the filer’s income and subtracts basic living expenses (this does not include paying their debts, but includes a clearly defined list of regular living expenses like housing costs, utilities, and so on). The resulting number is supposed to represent the debtor’s discretionary income and it is then multiplied by 60 – representing sixty months/five years – to see if the debtor’s alleged discretionary income is enough to enable him to pay off his debts through a five year Chapter 13 debt restructuring scheme. If this “discretionary” income exceeds $10,000, then the court will deny Chapter 7 protection, allowing only a Chapter 13 bankruptcy. This has been the most controversial aspect of the means test because the living expenses are too narrowly defined resulting in gross misrepresentations of what is actually “discretionary” in many cases.

If the debtor’s previous income exceeds the state median, but his “discretionary” income does not equal $10,000, then a third calculation comes into play. If the debtor’s discretionary income is less than $100 per month, then Chapter 7 is readmitted as an option. If the debtor’s monthly income is between $100 and $166.67 (the $10,000 mentioned above over five years), then more calculations come into play.

The means test is extremely complicated and was designed to be that way by the authors of the BAPCPA in order to discourage people from filing for bankruptcy.