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Understanding the means test for Chapter 7 bankruptcy
Chapter 7 bankruptcy allows Maryland residents to discharge many eligible debts. However, you must pass the means test, which evaluates your income, assets and obligations, to qualify for Chapter 7.
If you live in Maryland and struggle with mounting debt, learn more about whether you may be eligible for discharge by taking the means test.
What is the means test?
When you file a Chapter 7 bankruptcy petition, the court will determine whether your average income in the past 180 days exceeds Maryland's median income. If your earnings fall under that threshold, you can move forward to request a discharge. In 2021, the median income for a single person in the state is about $5987 a month or $71,839 a year.
Can I qualify with a higher income?
If your income exceeds the state median for your household size, the bankruptcy court will require documentation of your monthly expenses. These must not exceed the amount deemed reasonable for Maryland residents. If your approved expenses reduce your qualifying income based on the state's calculation, you can move forward with Chapter 7 discharge.
How the automatic stay shields debtors from collection activity
Many people file bankruptcy to shield their remaining assets from collection proceedings by their creditors. Unless these debtors have filed a bankruptcy previously, they may have no awareness of the automatic stay and how it can protect them from ongoing collection actions.
How the automatic stay works
A "stay" is a court order that directs a party to stop pursuing a designated action. In bankruptcy, the automatic stay a powerful took that shields debtors from collection efforts. The stay forces creditors to cease all collection activity, including phone calls, collection actions, foreclosures, evictions, and garnishments. The stay remains in effect until the bankruptcy court issues an order discharging the debtors' obligations.
The automatic stay does not protect certain obligations. These obligations include child support payments, alimony payments, certain tax debt obligations, and criminal proceedings that involve both a debt and criminal portion. In this latter example, the automatic stay will stop the debt portion of the proceeding, but not the criminal portion. Creditors can ask the court to lift the stay as to their claims, but such motions require a heavy burden of proof, and must show that the automatic stay is not serving its intended purpose. Additionally, the automatic stay will terminate after 30 days if you have filed for bankruptcy in the previous year.
What do you know about recovering financially from bankruptcy?
It took some time for you to become comfortable filing for bankruptcy, but you took the step. Have you made plans to make the most of your decision?
U.S. News & World Report offers suggestions for rebuilding your financial household after filing for bankruptcy. Take steps to improve your monetary health and maximize the advantages bankruptcy provides.
Keep your bankruptcy documents close
Rather than putting your bankruptcy paperwork out of sight, keep it in a convenient place. That way, you have the documents on hand if you apply for a loan and need to provide your bankruptcy petition. You may also need the documents as proof to show creditors you do not owe them money.
Create a plan for rebuilding your credit
While you may apply for secured credit cards to mend your credit score, step carefully. Now is the time to reevaluate your relationship with money and the road that led to you filing for bankruptcy. Rather than apply for and use credit without thinking, create an intentional strategy that supports your values surrounding money.
Who collects tax debt?
If you fall behind on paying your taxes, you will end up with tax debt that the government will keep trying to collect. You cannot get rid of this debt through bankruptcy, so you have to take it seriously.
The IRS is not in the business of trying to collect the debt you owe. According to the IRS, it passes this job to private debt collection companies.
The authority
Congress gave the IRS the right to use debt collection companies through the passage of a law. It is completely legal and the only way the IRS will handle overdue tax debt that meets specific requirements.
Collection process
The IRS will originally do the debt collecting. It will attempt to contact you and set up a payment plan or come to an agreement to resolve the debt. If this fails, the IRS may send your account to a collection agency after a year with no contact with you.
Avoid collection
You can delay or avoid a private debt collector getting your overdue tax account by staying in contact with the IRS. There are some situations that will allow you to prevent them from turning over your account. For example, if you were a victim of identity theft that impacted your taxes, communicate this with them and it will stop the collection transfer.
3 tips for dealing with emotional stress during bankruptcy
If you are in debt, you know the kind of stress and anxiety it can cause. If you have thought about filing for bankruptcy, you are one of many ready to take charge of your finances and move forward.
According to the United States Courts, in 2020, bankruptcy filings in the U.S. totaled 544,463. Although filing bankruptcy can be helpful overall, you should prepare yourself to effectively cope with the emotional stress it can create.
1. Talk to a professional
Talking to your friends and family about your financial situation may help ease your feelings of trepidation and anxiety. But if you need additional help coping with the bankruptcy process, reach out to a therapist who can provide you with strategies and ideas for moving forward.
2. Set up a financial plan
At some point during the bankruptcy process, think about your financial goals and budget for the future. Putting a stable financial plan in place can help you take full advantage of the fresh start filing for bankruptcy provides.
Bankruptcy may provide relief from overwhelming medical debts
Increased health care costs leave many Americans feeling helpless or trapped. As reported by NBC News, 72% of survey respondents revealed their medical bills prevented them from homeownership or starting a family. About half of Americans surveyed are struggling with unpaid medical debts worth at least $5,000.
According to Credit Karma, members of the online personal finance community experienced a 9% growth in outstanding medical bills over a one-year period. By March of 2021, its members held a collective $2.8 billion worth of past-due medical expenses.
Medical issues and a loss of income could cripple a budget
Illnesses requiring unpaid time off from work to recover or to care for a family member could result in a growing pile of unpaid bills. Individuals unable to get back to work may begin using credit cards to pay for necessities.
Bankruptcy exemptions in Maryland
Filing for bankruptcy is not something that anyone wants to do, but circumstances sometimes dictate that it is necessary. Some people think that it means losing everything to discharge debts, but there are some things that are exempt.
Here are a few of the more common exemptions you might run into.
Support and public benefit earnings
This includes child support payments. It can also include some earnings and public assistance benefits.
Retirement accounts and benefits
Some retirement plans like Individual Retirement Accounts (IRAs), accounts under the Employee Retirement Security Act (ERSA) and other employer-sponsored accounts have almost unlimited protection.
Tax-exempt accounts are also bankruptcy exemptions. Although there are some limitations to this, the majority are at least partially exempt.
Personal property
Some of your personal property is also exempt under bankruptcy proceedings. This includes tools of your trade, clothing and books. The courts also allow for prescribed health aids and medical equipment. You can also keep some of the appliances, books and clothing for your dependents.
Navigating bankruptcy during your retirement
Filing for bankruptcy can significantly lessen your debts and present you with a fresh start. While this is a valuable advantage, you may feel unsettled about starting over during your retirement years.
When you know some of the ways that bankruptcy may impact your retirement experience, you can strategize carefully to minimize collateral damage. With the right process, you can still enjoy your retirement, but without the negative effects of crippling debt.
Mind your assets
Bankruptcy will affect your assets. In what way and to what extent depends on state laws, the type of protection you file for and factors specific to your circumstances. For the most part, any retirement benefits in your name should remain untouched. However, officials may consider assets such as your home, for repayment of some of your debts.
Assess how filing for bankruptcy will impact your assets and your control over them. Working with a legal professional may help you to preserve as much of your assets as possible. Knowing your rights can also help you verify that you have successfully maintained what you rightfully deserve.
Does bankruptcy affect tax refunds?
There are many factors to take into consideration if you are thinking about filing for bankruptcy, but it is especially important to focus on the financial effects of bankruptcy. Although Chapter 7 bankruptcy offers a number of benefits for many people struggling with debt, there are other issues to review. For example, bankruptcy could interfere with your ability to receive a tax refund.
By recognizing potential hurdles, you can prepare for what lies ahead and increase your odds of a more favorable outcome.
How can Chapter 7 interfere with your tax refund?
According to the Internal Revenue Service, there are different reasons why some people do not receive their tax refunds during bankruptcy. For example, the IRS takes some refunds to pay off tax-related debt and in some instances, payment delays have nothing to do with bankruptcy. Moreover, some tax refunds are not delivered due to a turnover request by a Chapter 7 trustee.
How should I prepare for bankruptcy?
Even smart, responsible people can find themselves bogged down by debt. When this occurs, filing for Chapter 7 provides a way for you to get your finances under control, once and for all.
According to Kiplinger, you must prepare for a bankruptcy filing by taking the proper steps. Here are a few ways to help your case.
Curb your spending in the lead-up to filing
There is a belief that Chapter 7 discharges all debt. While it does relieve many types of debt, the court is very wary of fraudulent behaviors. As a result, your spending habits could land you in trouble.
Intentionally racking up debt prior to filing is bankruptcy fraud. The court typically checks the prior 90 days for suspicious purchases, such as vacations or luxury items. You are also not allowed to "sell" property to a friend or family member with the hopes of buying it back later. The court can reverse these transactions and seize the property for repayment.
Be prepared to disclose lots of information
Your assets will undergo a thorough accounting in bankruptcy court. You must answer all questions honestly and transparently. You must disclose all assets in your name, including retirement funds, money from investments, and other sources of income.
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