When you discover that your debt is overwhelming, you may want to curl into a ball and pretend it will all go away. Unfortunately, it won't. Once you realize that you are in over your head, you have to make the decision to make a change. In some cases, that time only comes when you get served notice of a pending lawsuit from a creditor or a pre-foreclosure letter from your mortgage lender.
If you know your debt load is inherently unsustainable, bankruptcy may be your best option. Even though making the decision can feel like a relief, you probably end up with even more questions. What kind of bankruptcy is right for you? What debts will be forgiven? How much of your acquired assets can you retain? The answers for each of these depends on your circumstances.
You must pass a means test to qualify for Chapter 7
Individuals can choose either Chapter 13 or Chapter 7 bankruptcy. In Chapter 13, the filing party works with creditors and the court to create a repayment plan that works with his or her budget. After a set period of regular payments, the outstanding balances on many debts, like credit cards, end up discharged. For those with higher incomes, Chapter 13 is a great way to get back in control of finances.
For those with lower incomes, however, repayment may not be feasible. You may barely make enough to cover your home, utilities and grocery bills each month. For these people, Chapter 7 bankruptcy offers discharge without a repayment period. In order to qualify for Chapter 7 bankruptcy in Ohio, those wishing to file must first pass a means test.
What is the standard used by the means test?
The means test looks at your income, minus your standard living expenses. After you deduct housing expenses, vehicle payments and other necessities from your monthly income, how much remains? The courts will look at your income over the last six months before you file for bankruptcy.
If your income is lower than the state median income for your household size, you automatically qualify for Chapter 7 bankruptcy. In Ohio, for a single person, that income level is around $43,000 per year.
For those with income over the state median, it is still possible to qualify. You have to provide certain financial information and documents to the courts. The courts will look at how much disposable income you have after specified living costs, like housing, transportation, utilities, childcare and food.
Once you have the final figure, which the courts consider your disposable income, you will know whether you qualify for Chapter 7 or whether the courts will expect you to use that disposable income to repay your debts. Even if you must repay your debts, you may still be able to file for Chapter 13 bankruptcy protections.