What Is the Means Test for Chapter 7 Bankruptcy?
The means test is an important part of the Chapter 7 bankruptcy process. It’s a way to determine whether or not someone is eligible to file for Chapter 7 bankruptcy and receive a debt discharge or not.
The means test takes into account your income, expenses, and other debts in order to determine if you have the means to pay back your creditors through a repayment plan. If you do, then you may need to file for Chapter 13 bankruptcy instead.
If you pass the means test, however, then you are allowed to proceed with filing for Chapter 7 bankruptcy.
You Must Have Consumer Debt
Before you file for bankruptcy, it’s important to consider whether or not most of your debt is consumer debt.
While many kinds of consumer debt such as credit card balances, medical bills, and personal loan debt can be discharged through Chapter 7, not all debt may be dischargeable. Examples of non-dischargeable debt include student loan debt, spousal support debt, child support debt, and payroll tax debt.
Debt secured by collateral, such as a vehicle or real estate, can be discharged in Chapter 7, but you must surrender the property to the creditor. If you wish to avoid this outcome, then Chapter 13 may be a good option for you.
Is Your Income Less Than Your State’s Median?
The means test for Chapter 7 starts by evaluating your current monthly income. Keep in mind that your “current monthly income” is typically assessed by the average of your gross income across the last six calendar months before filing for bankruptcy, multiplied by two.
If this income is less than the median income for your family’s size in the state, then this is all that’s needed; if your income is greater than the median, then the court will need to evaluate your expenses.
Evaluating Your Expenses
If your monthly income exceeds the state’s median income, you can qualify for bankruptcy if you can deduct enough allowed monthly expenses.
The difference between these values is considered your disposable income, and a greater amount of disposable income reduces your chances of qualifying for Chapter 7. The reasoning behind this is that you have what the law considers a reasonable amount of money coming in on a regular basis that you can use to pay off your creditors over time.
Allowed monthly expenses may include your mortgage or rent and reasonable costs for necessities such as utilities, food, transportation, your children’s education, and more. If your disposable income is still too high after these deductions, then you are disqualified from Chapter 7 and may wish to consider Chapter 13 bankruptcy or pursue other forms of debt relief.
We Can Evaluate Your Chapter 7 Bankruptcy Eligibility
How the bankruptcy court evaluates a Chapter 7 filer’s eligibility is a lot more involved than most people anticipate. That’s why you should seek experienced legal counsel to help you assess your eligibility for Chapter 7 before filing – that way there can be fewer unpleasant surprises to encounter on your path toward debt relief.
Learn more about how the services of our advocates at Buchalter & Pelphrey Attorneys At Law can help by contacting us online.