What is the Chapter 7 Bankruptcy Means Test?
As of October 2005, those who want to file for Chapter 7 bankruptcy have to pass the "Chapter 7 means test". This test is necessary to determine whether or not a person who is seeking to file for Chapter 7 bankruptcy has enough money available to make some payments to creditors in a Chapter 13 bankruptcy plan. The goal of the "means test" is to make Chapter 7 bankruptcy available to those who truly have no means to pay, and to encourage those who do have an available income to file for Chapter 13 instead, so their creditors will receive at least partial payment.
It is important to have a bankruptcy professional on your side, as the means test can get a little complicated. Our bankruptcy professionals will make the process much easier, and can help you understand if you qualify for Chapter 7 bankruptcy.
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The Means Test is a Two Step Process
Step One: Median Income Comparison
The Chapter 7 means test starts with a simple median income assessment. This means the first step of the Chapter 7 bankruptcy means test compares your monthly income to the median income in your state for the same amount of people as you have in your family. If your earnings are at or below the median income in your state, you qualify for Chapter 7 bankruptcy. If your earnings are higher than your state’s median income level, it does not necessarily mean you do not qualify, but rather initiates the second step of the test.
Step Two: Calculating Disposable Income and Unsecured Debts
The second step of the Chapter 7 means test calculates your disposable income and unsecured debts. Barring that your disposable income over the next five years does not exceed $6,000 ($100/month), you qualify for Chapter 7 bankruptcy, and may file accordingly. Our bankruptcy professionals can further clarify how disposable income is calculated. It is possible to still qualify for Chapter 7 bankruptcy protection if your disposable income is more than $6,000 but less than $10,000 depending upon what are considered allowable expenses for you and your family
Because there is a gray area between $6,000 and $10,000, another calculation is required. This calculation compares your disposable income over the next five years to a percentage of your unsecured debt; this determines if you are able to make any significant payments to your creditors. If your disposable income over that five years is greater than 25% of your unsecured, non-priority debts, it is the same situation for you as if you had more than $10,000 in disposable income. Therefore, if your disposable income over a five year period is less than 25% of your unsecured, non-priority debts, you "pass" the means test.
You Don't Have to Sort Out the Means Test Alone
One of the benefits of having a bankruptcy professional is that they can help you determine if you qualify for Chapter 7, and if you "pass" the means test. The calculations can be complicated because of the steps you must follow throughout the test, and it requires knowledge and understanding of the rules regarding how your income is calculated for the purpose of the means test, which debts can be classified as unsecured and non-priority, and a firm grasp of the IRS allowable expenses figures in different categories. In general, most people who want to file for Chapter 7 bankruptcy learn they are eligible to do so. Our bankruptcy professionals can help you understand how the means test effects your bankruptcy options.
Study for the Chapter 7 Means Test in More Detail!
If you would like more information on the Chapter 7 means test, take a look at our Chapter 7 Means Test law library page. Speaking to an experienced bankruptcy professional can also assist you with any questions you have as well - the sooner the better. Fill out our free bankruptcy case evaluation form. We will help you set up a free, no-obligation consultation with one of our bankruptcy professionals.