What is the Bankruptcy Means Test

• A bankruptcy ‘means test’ is what will determine whether or not a person’s income is actually low enough for that individual to be eligible to file for Chapter 7 bankruptcy.
• It is based on a formula that is designed to prevent individuals who have higher incomes from being able to file Chapter 7 bankruptcy.
• Higher income individuals who fail the test cannot use Chapter 7 bankruptcy to completely erase all of their debts, but can use Chapter 13 bankruptcy as a means of repaying a portion of the debts.
• Being required to take the Chapter 7 bankruptcy means test does not mean that an individual must be completely penniless to file for this type of bankruptcy. It is quite possible to have a substantial monthly income but still qualify for a Chapter 7 bankruptcy if an individual has a significant amount of expenses, such as large mortgage payments.

How Does the Chapter 7 Means Test Works?

• The test was created as a means of limiting use of Chapter 7 bankruptcy only to individuals who are genuinely incapable of paying their debts.
• The test is based on the individual’s average monthly income for the six month period prior to filing for bankruptcy. Monthly expenses are deducted from this amount to determine the amount of disposable income the person has each month.
• People with higher disposable incomes will not be permitted to file for Chapter 7 bankruptcy.
• The means test is only used for bankruptcy filers whose debts are primarily consumer debts rather than business debts.
• In order to take a means test, the first step is to assess whether or not your income is higher or lower than the median income of the state where you live.What If Your Income is Higher Than the Median?

  The Initial Step is a simple one: if your present month earnings are lower than the median income of an equivalent sized household in your state of residence, then you pass. If you pass the first step, then you will no be required to finish the remainder of the means test. You are allowed to file Chapter 7 Bankruptcy

  How is it determined if You Have Sufficient Disposable Income for Repayment of Some Debts? In the case of individuals whose income is higher than the state medium, the computations of the means test get considerably more complex. It must then be determined if an individual has enough left over income after allowing monthly expenses have been paid, to pay a portion of the unsecured debts such as outstanding credit card bills. If the disposable income exceeds a specific amount, it means the means test has been failed and the individual will not be permitted to file for Chapter 7 Bankruptcy. The median income level will change depending on the size of your household and what state you live in. Each different area has its own determined amounts for expenses such as transportation, housing and other basic necessities.

What Happens if You Pass the Chapter 7 Means Test?

• Passing the means test doesn’t always mean that filing Chapter 7 bankruptcy is the best option for you; it merely means that you can file Chapter 7 if you choose to.
• The decision of whether or not to file Chapter 7 bankruptcy is one that you should weigh carefully and only choose this route after you have considered all factors involved as well as all possible alternatives.

What Happens if You Don’t Pass the Chapter 7 Means Test?

• People who do not pass the Chapter 7 bankruptcy means test will be limited to filing Chapter 13 bankruptcy. In a Chapter 13 bankruptcy, you will be required to make regular monthly payments and follow a strict budget that will be monitored by the courts.
• Most people seeking to file bankruptcy prefer to file for Chapter 7 because no payment is required.
• Chapter 13, on the other hand, is the best way to manage certain financial problems, such as fixing a defaulted mortgage