In Michigan, personal bankruptcy is considered a fresh start because the person filing, called a debtor, receives a fresh financial start. The type of fresh start a debtor receives depends on the bankruptcy chapter they file. For instance, chapter 7 is the bankruptcy to eliminate unsecured debts. Unsecured debts are those given to the debtor based on their promise pay. These debts include credit cards, department store cards and personal loans.
Chapter 13 doesn’t eliminate unsecured debts. Instead, it provides a fresh start in a different way. It allows a debtor to repay creditors over a period of time. The time frame can range anywhere from three to five years. Debtors can pay unsecured and secured debts. Secured debts are any type of credit given based on some type of collateral. One example of a secured debt is a mortgage.
Bankruptcy Laws in 2005 Changed Personal Bankruptcy
Prior to 2005, debtors could pick the bankruptcy chapter they wanted to file. This made it easier for people to avoid filing chapter 13 even if they had the money to repay creditors. So, the federal government changed the laws to require debtors to qualify for bankruptcy. In addition to qualifying for bankruptcy, a debtor must complete a means test to determine which bankruptcy chapter they can file.
The Michigan Means Test is not a Standardized Test
The Michigan means test is where a debtor must add up their income for the last six calendar months. Divide them by six to find your medium income over that time period. Multiply your medium income by 12.
The debtor must find Michigan’s income for their household size. For instance, if a debtor has a household with four people, they must find the Michigan income level for a household of four people. The next step is to subtract that income from the Michigan family household income in the same household size.
If the total is in the negative, this means the debtor doesn’t have enough money to repay creditors under a chapter 13 bankruptcy. They can file chapter 7. However, if the debtor has money left over, it’s is called disposable income. This disposable income can go towards paying creditors in a chapter 13 bankruptcy.
The means test is complicated. If a debtor tries to complete it on their own they may not qualify for the bankruptcy chapter they need. For example, a debtor needs to file chapter 13 to save their home from foreclosure. Only chapter 13 has the automatic stay to immediately prevent lenders from continuing, starting or auctioning property. The reason why they may not qualify is they may have forgotten some income. A bankruptcy law attorney Brighton MI will help a debtor determine if they have enough income to file a certain bankruptcy chapter.
Other Steps to Take Before Filing for Bankruptcy in Michigan
Besides the means test, a debtor must complete pre-bankruptcy counseling with a certified bankruptcy counselor. The purpose of the counseling is to see if you can choose an alternative to bankruptcy such as creating a budget to get out of debt.