Understanding the Chapter 7 Bankruptcy Means Test
Before filing your petition for bankruptcy your lawyer will help you to complete a bankruptcy means test. This test is designed to determine if, after calculating your budget, you have any disposable monthly income left over to put towards paying off your debts.
If you pass the means test, meaning you have no disposable income, you can file for Chapter 7 bankruptcy. If you fail you will be limited to a Chapter 13 filing. The bankruptcy means test ensures that individuals with high incomes are not able to use bankruptcy as a way to eliminate their debts despite having money to put towards repayment.
How Does the Bankruptcy Means Test Work?
The first thing you will do is look at your average monthly income for the six month period preceding your decision to file for bankruptcy. Your first step is to determine whether or not your monthly income is above or below the median income for your state. The median is set state by state and you’ll have to ask your bankruptcy lawyer to help you to determine what your state’s median is. If your income is below the state median you automatically pass the bankruptcy means test and can move forward with your Chapter 7 filing.
If your income is above the state median you’ll have to calculate your monthly disposable income. You will start by creating a budget that outlines how you spend all of your money. You’ll include expenses such as rent or mortgage, utility bills, clothing expenses, medical expenses, car payments, gas for the car, and even food. You’ll subtract the total of your monthly expenses from your total monthly income and the number that is left over is your disposable income. The higher your disposable income the less likely you’ll qualify for a Chapter 7 bankruptcy filing as the courts will determine that you should be putting part of that income towards debt repayment. If that case you might have to file for Chapter 13 bankruptcy instead.
How do I know if I qualify for chapter 7 Bankruptcy?
Passing the Chapter 7 Bankruptcy Means Test
If you pas the Chapter 7 bankruptcy means test you can file for Chapter 7 bankruptcy but you don’t have to. The means test will give you a great idea of where you stand financially but the results do not mean you have no other options. Your creditors may be willing to settle your debt for less than you owe or you may be able to refinance some of your loans with lower interest rates. Remember, Chapter 7 bankruptcy is just one of your options but it shouldn’t necessarily be the first one you jump to use.
What if I Fail the Chapter 7 Bankruptcy Means Test?
Failing the Chapter 7 bankruptcy means test isn’t the end of the world. Everyone would prefer to be able to file for Chapter 7 because it wipes the slate clean but failing the test doesn’t necessarily mean you’re going to be stuck with mountains of debt.
Under Chapter 13 bankruptcy you’ll set a very strict, court-monitored budget. Over the course of 5 years you’ll be required to make payments to pay back parts of your debt. After that time the remaining balance will be discharged. Your payments will be within your manageable budget as determined by your means test but will ensure that you are not foregoing basic life necessities in order to make payments.
The bankruptcy means test is a reasonable method for the courts to ensure the bankruptcy system isn’t being abused by the public at large. Bankruptcy is a serious decision and should be reserved for those who have no other choice – not by those who simply want to weasel out of their loan payments.
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