Most people who file a personal bankruptcy petition in U.S. Bankruptcy Court file a Chapter 7 Bankruptcy that, if approved, will discharge the vast amount of their debts.
What Are Allowable and Reasonable Expenses?
Unlike Chapter 13 Bankruptcy, which requires a repayment plan over several years, those who file under Chapter 7 must give up any property to pay back creditors that is not covered by court-sanctioned "exemptions." Such exemptions apply to one's home, car, furniture and other possessions the debtor needs to maintain a normal household.
"You need only give up your 'non-exempt' property, which for most people, once the proper exemptions are applied, amounts to nothing. In other words, in many cases much or all of your property will be exempt," according to BKMass.com.
In addition, the court recognizes "allowable and reasonable expenses" that everyone, including debtors, need to live on. As a result, a means test outlined in the bankruptcy regulations will measure how much of their income debtors will be allowed to keep to pay for their living expenses.
Beyond household expenses such as utilities and housing costs, reasonable expenses may include the cost of health and disability insurance, support of dependent children under age 18 and the care of an elderly or ill member of the family.
The two-part means test first applies a formula for exemptions to determine if the debtor can afford to pay back creditors for unsecured debt, such as credit cards or medical expenses. The second part of the test is based on how the debtor's income compares to the average income for the state in which they live.
If a debtor's income is above the average in their state and they are able to pay at least 25 percent of their unsecured debt, they will not qualify for a Chapter 7 Bankruptcy and may be allowed to file under Chapter 13 instead.
Some special considerations covered by the bankruptcy code take into account whether the debtor is an active duty military service member, a low-income military veteran or someone who has a serious medical condition.
Even in cases in which a debtor's income falls below the median level, their ability to fund a Chapter 13 repayment plan is considered. "This common-sense nugget at the heart of the bankruptcy system states that if you can afford to pay none of your debts, you pay none of your debts, but if you can afford to pay some of your debts, you pay some of your debts," states BankruptcyLawInformation.com.
More Help on What Are Allowable and Reasonable Expenses?
- Chapter 13 Repayment Plan - The Chapter 13 Bankruptcy Repayment Plan can be quite confusing when you are unsure of the details. Here we highlight some of the major questions and topics regarding the Chapter 13 Repayment Plan - read more
- Exemptions - Bankruptcy exemptions are a list of all the assets, personal items and goods that can not be liquidated in Chapter 7 Bankruptcy or sold in Chapter 13 Bankruptcy to repay creditors. - read more
- Means Test - The means test, which is outlined in Section 707(b)(2) of the Bankruptcy Code, makes it more difficult for individuals to have their debts discharged through Chapter 7 Bankruptcy. - read more
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