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Considering bankruptcy; a fresh start
by Roger McCaffrey

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Q. During the holidays I have been going wild with my credit cards. I find myself buried in debt and I don't even know how much I owe. I just lost my job this year and have been afraid to open my mail because of all the bills. Should I file for bankruptcy?

A. Over five years ago Congress enacted a new Bankruptcy law. The law made substantial changes to Chapter 7 requiring a "means testing" approach to consumer bankruptcy. The law requires people with incomes above their state's median income level, who can pay at least $6,000 over five years (that is, $100 a month), to involuntarily enter into repayment plans. Currently, the median income for single people in Illinois is $45,545.00

When an individual files for a Chapter 7 bankruptcy, their income is subject to a two-part means test. The judge subjects the individual's income to a formula that exempts certain expenses (rent, food, etc.) to determine whether that individual can afford to pay 25 percent of their "nonpriority unsecured debt", such as credit card bills. Second, the individual's income is compared to the median income of the state where they reside.

If the individual's income is above their state's median income and they can afford to pay 25 percent of their nonpriority unsecured debt, then that individual cannot file for Chapter 7 bankruptcy, but can under Chapter 13. If the individual's income is less than the state median income but they can still pay 25 percent of their unsecured debt, then they may be able to file a Chapter 7 bankruptcy still. In a Chapter 7 bankruptcy, your assets, minus those exempted by your state, are liquidated and given to creditors, and many of your remaining debts are cancelled. Since many Chapter 7 filers don't have assets that qualify for liquidation, credit card companies and other creditors can get nothing.

For the individual in the question, since you are unemployed the threshold to file a Chapter 7 is much lower and its benefits and burdens should be thoroughly reviewed with your bankruptcy attorney. AND Be careful with credit card charges, the law does not allow you to run up your credit cards and then discharge your debts in a Bankruptcy. Some of those debts may not be dischargeable if they are incurred too close to a filing.

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