Before you file for bankruptcy, there are several steps you can take to be sure that it is the best decision for you. Credit counseling is a required step, but you also must take something called a Means Test. The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act necessitated the means test after tightening up bankruptcy law to prevent bankruptcy frequent fliers. Basically, it made bankruptcy more exclusive to only those who truly needed it to make a fresh start. The Means Test will determine if Chapter 7 or Chapter 13 bankruptcy serves your needs the best. Gathering your proof and documentation can help to aid you in this process.
OBTAINING A BANKRUPTCY LAWYER
Before working through the Means Test, acquiring a lawyer may help you to navigate through the laws and rules surrounding bankruptcy. The first form is 122A-1, but it is the first of many. The entire complicated process may take 6-8 months even if you have your documentation ready to go. A specialized bankruptcy lawyer can ease the burden of this process for you and alleviate some of the stress while ensuring that you are following the letter of the law in order to gain your fresh start.
DOCUMENTATION & 122A-1
The main objective of the means test is to examine your median income for the past six months to determine if yours is less than the state’s median income. Proper documentation of your income for the last six months is crucial in this process. If your income is less, then you pass the test and qualify to apply for Chapter 7 bankruptcy. In Nevada, the 2019 median income for a household is $63,276.00, and for a family household, it is $76,124.00. Median income varies widely by state and fluctuates by year, so be sure to check the numbers. In order to complete the 122A-1, you will need pay stubs from the last 6 months for both you and your spouse if filing together; any additional income from child support, businesses, or investment; unemployment or retirement income; and any other sources of income like bank deposits, cash gifts, or other accounts.
STEP 2 – FORM 122A-2
If it is higher than the state’s median income, then you move on to the next step of the test which examines your expenses versus your income – Form 122A-2. This dives deeper into your financial situation and discovers what your means really are. Whether or not you have the money to pay off your debts is a determining factor in bankruptcy. After basic needs, this form will help you to determine what is left for debt. This is an intense form that requires you to list every aspect of your financial situation, from basic food and clothing needs to healthcare and housing expenses, from tax exemptions to court-ordered payments, and even details from previous tax years. Nothing escapes the scope of the form in order to ensure that you are not abusing the bankruptcy system as people have done in the past.
PRESUMPTION OF ABUSE
After calculations, if your disposable income is over $13,650, then you fall into the presumption of abuse category; if not, you can still file for Chapter 7. The form takes your monthly disposable income and multiplies it by 60 months to determine what you can pay towards your debt for a 5-year time period. If your 5-year disposable income is less than $8,175, then there is no presumption of abuse. However, if you fall between $8,175 and $13,650, you still have more work to do before you can file.
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