The decision to file for Chapter 7 bankruptcy or Chapter 13 bankruptcy may not be left in the hands of the individual debtor. Previously, the most common reason for someone to file under Chapter 13 was to avoid the loss of equity in their home or other property. While equity protection will continue to to be a reason for people to choose Chapter 13 over Chapter 7, the new bankruptcy rules will force many filers to choose Chapter 13 even if they have no equity. The means test now takes into account the debtor's income level. The means test is applied by the Courts looking at the debtor's average income for the 6 months prior to the filing and comparing it to the median income for the state where the debtor resides. If the income is below the median, then Chapter 7 remains a viable option. If the income exceeds the median, the remaining parts of the means test are applied.

The remaining portion of the means test calculation takes into account income less living expenses (excluding payments on the debts included in the bankruptcy) and multiplies that figure by 60. This represents the amount of income available over a 5 year period for repayment of the debt obligations. If the amount of income available for debt repayment over the 5 year period is $10,000 or more then Chapter 13 will be required. Therefore, anyone earning above the state median, and with at least $166.67 (10,000/60) per month of available income, will automatically be denied Chapter 7.

If the debtor is above the median income but does not have at least $166.67 per month to pay debts then the final part of the means test is applied. If the available income is less than $100 per month then Chapter 7 becomes an option once again. If the available income is between $100 and $166.66 then it is measured against the debt as a percentage with 25% being the benchmark. If the income available to pay debts is less than 25% of the debt then Chapter 7 is still an option. However, if the income available to pay debts is greater than 25% Chapter 13 would be required.

Currently, the median income in Michigan is $44,703 (1 earner), $53,575 (2 person family), $63,339 (3 person family), and $76,312 (4 person family).

Jeffrey Herrick