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.

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.

Unless the debtor is a home owner with a lot of equity in their property, most people that find themselves considering bankruptcy are people that do not really qualify for any sort of additional loan. This pretty much rules out the idea of a debt consolidation loan or a personal loan meant for debt consolidation purposes. The big exception to this rule are people that own significant equity in their homes. People that already own a lot of equity can frequently get a home equity loan, or second mortgage, using the equity as their collateral. If this is an option for you, it would probably be better than filing for bankruptcy.

Being unable to get a loan or credit, another option is to at least explore the possibility of debt settlement agreements. These are agreements made directly between the creditor and the debtor whereby the overall amount owed is reduced in exchange for a solid payment of most of the debt immediately. The idea from the lender’s perspective is that it is better to get much or most of the amount owed now, as opposed to waiting a prolonged period of time to for the full amount owed. However, in most cases, debt settlement requires the debtor to pay a large percentage of the debt up front, which may not be an option. After all, if the debtor has enough to make the large upfront payment, then he or she probably has enough to make the smaller, regular payments.

Other options may also be available, depending on your personal situation. As a matter of law, anyone wishing to file for bankruptcy today has to go through credit counseling with an approved credit counseling agency. These credit counselors will review your overall situation – both income and liabilities – and then will make a recommendation on the best way to proceed. In the process, they may well suggest some other option that would be preferable to bankruptcy and in fact this is why the counseling requirement was added to the bankruptcy process in the United States. If there is a viable alternative, the credit counselors will recommend it; and they may even refuse to issue you the certificate you need to prove that you underwent the counseling at all.

Bankruptcy is never a good option, though sometimes it is the best option available. However, making this determination really requires a consultation with a debt expert, which is why the requirement for credit counseling before you can file for bankruptcy might be a pretty good idea.