Filing for Bankruptcy Is a Complex Process

​Bankruptcy is a major life step and, just as with any other change in life, it requires careful consideration. Many people understand that bankruptcy is all about debt relief but have far less information when it comes to the specifics of this process. Here are some of the key areas you want to do your research in before beginning this process.
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​Debt Definitions
Debt is somewhat of a generic term, but bankruptcy laws require debts be clearly defined, and you want to have a precise idea what type of debts you hold to determine if bankruptcy is an option you can consider. In bankruptcy, debts typically fall within one of two categories — secured or unsecured debts — and have a priority rating.

Secured debts are those attached to a property, such as a car loan, and unsecured debts are the opposite, such as personal bank loans. Secured and unsecured debts are typically dischargeable in bankruptcy.

However, debts with a priority rating typically aren't dischargeable, and they receive priority status when a repayment plan is established. Taxes and child support often receive this label. If the debts you're looking to discharge fall into this category, bankruptcy may not be for you.

The Means Test
Once you decide to file for bankruptcy, you're required to complete a means test. Bankruptcy protection is a process meant to safeguard those individuals who truly have debt that they can no longer manage, not for those individuals looking to get out of paying back money they owe. The means test will determine where you fall on this scale.

The state of Wisconsin has created a means schedule that is based on your income and the number of people that live in the home. The more people in the house, the more income an individual can earn and still qualify.

For example, a person who lives in a two-person home will have an annual income cap of $29,870, but a person in a six-person house caps off at $49,943. An income exceeding these income levels does not mean you can't file for bankruptcy, but it does determine what form of bankruptcy you can file.

Disposable Income
When debt is overwhelming, many people file for bankruptcy with the goal of eliminating their debt. Protection in this form is known as a Chapter 7 filing. Chapter 7 is a more favorable option for filing because it is a straightforward process that allows many people to eliminate all, or a large portion, of their unsecured debts without any repayment requirement.

However, to further complicate matters, an individual must be able to pass guidelines pertaining to their disposable income, as well. Consider two separate six-person households, where the people that plan to file for bankruptcy earn $45,000 annually.

In Home A, rent, food, and other obligations leave the person with very little money left over each month. However, the person in Home B has very few living expenses and has a fair amount of money left over each month.

Depending on the additional factors surrounding their debt, the person in Home B might meet the median income level but fail the disposable income test. A person that falls into this category might be required to file for Chapter 13 protection, where they will pay back a portion of their debt.

You deserve to live a life where you aren't drowning in debt; use this information to work towards the goal of resolving your financial difficulties so that you can move forward in your life.

Whether you have questions about whether bankruptcy is right for you, or you know you're ready to file, at The Michelson Law office, we are happy to sit down with you and discuss your situation. Contact our office today.