Chapter 7 Bankruptcy Means Test

What is the Means Test in a Chapter 7 bankruptcy?

The Chapter 7 bankruptcy Means Test is simply a process whereby a determination is made as to whether you are eligible to file a Chapter 7 bankruptcy.  It is designed to keep debtors with high incomes from filing for Chapter 7. Debtors with substantial incomes may use Chapter 13 to repay a part of their debts, however, they may not use Chapter 7 bankruptcy to wipe out their debts altogether.

However, this does not mean in order to file a Chapter 7 bankruptcy you have to be penniless, you may still have a substantial income and file for a Chapter 7 if you have a lot of expenses like high mortgage and car payments, taxes and other expenses.

How does the Chapter 7 Bankruptcy Means Test Operate?

The Chapter 7 Bankruptcy Means Test involves deducting specific monthly expense from your current monthly income (which is your average income over the 6 calendar months before you file for bankruptcy) to come to determine your monthly disposable income. The higher your disposable income, the less the chances are that you will be eligible to file a Chapter 7 bankruptcy.

However, if a debtor has only business debts that he or she need not take the Means Test. The Means Test is only applicable to filers with primarily consumer debts. In order to take the Means Test, you must work out if your income is more or less than the median income in your state. In the event that you do earn more than the median you must work out whether you have enough left over, after deducting certain expenses, to repay some of your creditors.

What if your income is more than the median?

If your income is less than the median for a household of your size in your state, then that’s it, you’ve passed and you may file bankruptcy under Chapter 7, and you do not have to complete the rest of the Means Test.

What if i do have enough disposable income to repay some of my debts?

If your income is higher than the median for your state, then the Means Test becomes more complicated. You will have to work out whether you have sufficient income left over, which is known as disposable income, after paying your “allowed” monthly expenses, to repay at least a portion of your unsecured debts, like your credit card bills. Unfortunately, if your disposable income exceeds a specific amount, then you do not pass the Means Test and you cannot file bankruptcy under Chapter 7.

The median income levels vary according to state and household size, and each county and metropolitan area has different allowed amounts for criteria for expenses.

What if you pass the Means Test?

You shouldn’t base your decision to file a Chapter 7 bankruptcy on whether or not you pass the Means Test. Passing the Means Test simply means that you can. A decision to file a Chapter 7 bankruptcy should be based on other relevant and important factors, as explored in other articles by the experts at ZocLaw.com.

What if you don’t pass the Means Test?

If you do not pass the test, then you are limited to filing a Chapter 13 bankruptcy. Under a Chapter 13 bankruptcy, you are required to make monthly payments over 3-5 years to your creditors to extinguish your debts. Lots of people file for a Chapter 7 as there is no repayment, however, Chapter 13 also has some advantages and may be the best way to deal with specific problems like curing a default on a mortgage.

However, it is advisable to speak to an experienced bankruptcy attorney before you file a Chapter 13, as they are the experts, and you might find that you pass the Means Test after all.  

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