The new bankruptcy law provides for a “means test” to determine bankruptcy eligibility using a system of allowable deductions from gross income based on IRS standards to arrive at net disposable income. The net disposable income qualifies the debtor for the kind of bankruptcy that he can file. If the debtor has zero or minimal disposable income, then he qualifies for a Chapter 7 discharge of his debts without paying his creditors anything. However, if debtor has some disposable income that is within the minimum threshold set by the “means test”, then debtor would not qualify for Chapter 7. Instead, he would qualify for a Chapter 13 or 11, depending on the amount of money he owes. Most debtors want a Chapter 7 discharge so they can start fresh without debt. On the other hand, debtors who are trying to save their houses normally resort to Chapter 13 where they are given 3 years to pay the default portion of the mortgage. For example, debtor is a registered nurse. Her gross income with two jobs is $120,000. She owns a home with some equity and she is current on mortgage payments. However, she owes $80,000 of credit card debt. She wants to have a fresh start without credit card debt so that she can become productive again. Normally, she would want a Chapter 7 discharge of her debts. If means testing determines that she is qualified for a Chapter 7, she will no longer owe any credit card debt while keeping her house, her income and most if not all of her assets.

Let’s change her circumstances a bit. If she is 6 months behind in her mortgage payments because of some emergency and now wants to save her house from foreclosure, she would opt for Chapter 13. If her mortgage default amount is $12,000, the Chapter 13 will stop the foreclosure for 3 years while she pays the trustee $366 monthly for 36 months. At the end of the third year, she will be back on current status. Thus, she saved her house by Chapter 13.