Texas Bankruptcy Law and the Means Test Explained

Understanding Texas Bankruptcy Law is crucial for anyone considering filing for bankruptcy in the state. One of the most important aspects of this law is the Means Test, which determines whether an individual qualifies for Chapter 7 bankruptcy or if they must file under Chapter 13. This article will provide a comprehensive overview of Texas Bankruptcy Law and detail the Means Test process.

In Texas, bankruptcy serves as a legal option for individuals and businesses facing overwhelming debt. The two primary types of personal bankruptcy available are Chapter 7 and Chapter 13. Chapter 7 allows for the liquidation of assets to repay creditors, while Chapter 13 provides a repayment plan to pay off debts over three to five years.

The Means Test plays a vital role in the bankruptcy process. Instituted as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, the Means Test was created to prevent high-income earners from abusing the Chapter 7 bankruptcy system. It assesses your income, expenses, and debts to determine your eligibility.

To begin the Means Test, individuals must first calculate their current monthly income (CMI) by averaging their income over the six months preceding their bankruptcy filing. In Texas, the income limits are adjusted annually, and it's essential to compare your CMI against the median income for your household size in Texas. If your CMI is below the state median, you typically qualify for Chapter 7 bankruptcy.

If your CMI exceeds the median, the next step of the Means Test involves assessing your allowable expenses. This includes necessary living expenses based on IRS standards, which can cover housing, utilities, food, transportation, and other essential costs. Once these expenses are subtracted from your monthly income, if your disposable income is low enough to show that you cannot afford to repay creditors, you may still qualify for Chapter 7.

In contrast, if your disposable income indicates that you have the ability to repay a significant portion of your debts, you will be required to file for Chapter 13 bankruptcy. Here, a repayment plan is established, and you will make monthly payments to a trustee who will distribute the funds to your creditors over the plan’s duration.

It’s essential to note that the Means Test is complex and can involve various deductions and exemptions. Additionally, Texas offers certain exemptions that can help protect specific assets during bankruptcy, such as a homestead exemption, which is significantly higher than in many other states. This means that homeowners in Texas may protect a larger value of their home from liquidation in a Chapter 7 filing.

In conclusion, navigating through Texas Bankruptcy Law and the Means Test can be complicated, but understanding these processes is key to making informed decisions about your financial future. Whether you are considering Chapter 7 or Chapter 13, consulting with a qualified bankruptcy attorney can help you assess your situation, understand your options, and guide you through the entire filing process. By exploring these legal pathways, individuals can regain control over their finances and work towards a fresh start.