Bankruptcy Means Test
Before 2005, nearly everyone seeking relief through bankruptcy would opt for Chapter 7 since it would discharge most of their debts. It would then be up to the discretion of the bankruptcy judge to let them continue with a Chapter 7 or change it to Chapter 13 bankruptcy. However, Congress amended the laws in 2005 to restrict the number of people who would be eligible for a Chapter 7 discharge. With the changes, debtors had to meet a certain income requirement. This became known as the “means test.” Every state has its own income requirements based on median income.
The first part of the means test determines where your household income falls in relation to your state’s median income You’ll need to gather documents to prove your income for the previous six months. There are exceptions and adjustments if your income has changed in any way during this period, including a drop or increase in wages. If your income falls below the median income for a similarly sized household in your state, then you pass the means test.
Allowable Expenses and Disposable Income
If your income is above the median income in your state, you still might be eligible to file a Chapter 7 petition. You’ll need to gather receipts and other information to document your expenses over the previous six months. You can often deduct costs for housing, medical care, utilities, groceries, clothing and other essentials. Any remaining income is considered “disposable income.”
When creating this list of allowable expenses, you need to be as thorough as possible. If you fail to include certain expenses or have inaccurate or conflicting amounts, it could lead to your case being dismissed.
Passing the Means Test
If you pass either parts of the means test, you will be able to file for Chapter 7 bankruptcy and have most of your unsecured debts discharged. If you do not pass the means test, you will often still be eligible for Chapter 13, which allows you to keep your assets and restructure your payments to be more affordable.
Purpose of lower-income Test
The means test can guide lower income debtors to file for Chapter 7 bankruptcy and higher income debtors to file for Chapter 13 bankruptcy. Chapter 7 can completely discharge debts while Chapter 13 filers will need to repay at least some of their debts. The system might seem complex, but most people who attempt to file for Chapter 7 bankruptcy will pass the means test. Those who do not will still have the option to file for Chapter 13.
Bankruptcy can be a confusing legal process, and you shouldn’t have to face it alone. If you’re not sure which type of bankruptcy would be most beneficial to you or which one is most appropriate for your financial situation, First America Law can help. Our experienced bankruptcy representatives are knowledgeable in the various points of bankruptcy law and can walk you through the process. If you’re struggling with debt, call our offices at 1-800-695-7674 today to schedule your free evaluation.