Congress passed a sweeping reform of the bankruptcy law in 2005 in response to what they termed “abuse” of the system by debtors who really could afford to pay, but chose not to. The reforms made it tougher to file for chapter 7 bankruptcy and also made it more expensive in the process.

Chapter 13 or Chapter 7

There are two types of personal bankruptcy, chapter 7 and chapter 13. In chapter 7, you will have to liquidate non-essential assets to pay some of the debt. Since most who file chapter 7 don’t have a lot of assets, your slate is basically wiped clean and your creditors receive little or nothing. A chapter 13 takes what you have, including income, and reorganizes it, putting you on a repayment plan that can last as long as five years.

The Means Test

To help decide which bankruptcy law you can file under, new guidelines make a simple comparison of your income to the median income for a like-sized household in your state. If you fall below the median, you can file a chapter 7. If you make more than the median, the next step is “means” test. Allowed expenses such as rent and groceries are subtracted, as well as any debt payments (car, home loan, etc.) from your income. If that adjusted income is lower than a certain amount, you will still be able to file a chapter 7.

Credit Counseling

The new bankruptcy law also mandates that anyone who file for bankruptcy, whether it’s chapter 13 or 7, must meet with a credit counselor first to consider a repayment plan. You don’t have to agree with it, but if the counseling agency comes up with a plan, you must include it in your filing. Between the time you file and when the case is decided, you must attend another counseling session to learn how to manage your finances.


If you’re struggling to pay off debt, bankruptcy may be one of your options. If you have questions, contact Brent George Law for a free consultation and for help assessing your situation.