The bankruptcy means test determines who is eligible for debt relief via Chapter 7 bankruptcy.
The test considers an individual’s income, expenses, and family situation, in order to determine whether enough disposable income is available to repay the outstanding debts.
Although the means test was originally intended to restrict the number of individuals eligible to have their debts forgiven through a Chapter 7 bankruptcy, most debtors easily pass the test.
The following is an explanation of the means test process and how it affects your bid for bankruptcy.
How the Means Test Works
Bankruptcy can be overwhelming and confusing. Which debt relief option is right for you? The means test will clarify for which bankruptcy filing – Chapter 7 or Chapter 13 – you qualify.
The means test has two portions; both intended to determine if you have any disposable income that can be used for paying off debt. Typically, your bankruptcy lawyer will assist you in filling out and submitting the form to the court.
The test is designed for individuals with consumer debts, such as medical bills or credit card debt. If an individual’s debt is primarily from a business, the means test does not apply.
In Chapter 13 bankruptcy, the means test is considered when establishing a repayment schedule.
The first portion of the means test determines whether your household income is below your state of residence’s median income.
You should be prepared to provide six months of comprehensive income documentation. While the test is based on the six months before filing, it does take any necessary adjustments into account – for instance, if you recently lost your job or are starting in a new position.
If your income based on this method is determined to be below the median income, you pass the means test and are eligible for a Chapter 7 bankruptcy filing.
Historically, approximately 85% of debtors seeking bankruptcy pass the test in Part 1. For those who do not pass this portion of the means test but still hope to file Chapter 7, there is a second portion of the test. (Those wishing to file Chapter 13 will also participate in this second step.)
Like in Part 1, you will be required to provide documentation from the last six months, this time reflecting your expenses. “Allowable expenses” include rent, medical costs, and food, among others. After all allowable expenses are calculated, the remaining income is considered disposable, and available for debt repayment.
A bankruptcy attorney will work with you to make sure that you are including everything necessary, but is not likely to know the intricacies of your family life and financial situation. Therefore it is your responsibility to be thorough and precise.
Over-estimating expenses can get your filing rejected, while not including all of your allowable expenses may make you ineligible. Being accurate during this step of the process is essential. If your disposable income is proven to be low enough, you could qualify for a Chapter 7 bankruptcy.
If you are filing Chapter 13 bankruptcy, the allowable-expenses part of the means test will be utilized when drafting the terms of your repayment plan.
What it Means to Pass – or Fail – the Means Test
- Passing the means test allows you to file for Chapter 7 bankruptcy. Chapter 7 will forgive the majority of your unsecured debts, like credit card debt. While this sounds inviting, it may not be the best option. Chapter 13 bankruptcy permits you to catch up on your debt payments (such as a mortgage or overdue loans) while retaining your assets. Chapter 7 eliminates many debts, but it may necessitate you to liquidate your assets.
- If you fail the means test, you can either file for Chapter 13 bankruptcy or wait to file Chapter 7. Remember, the means test is based upon the last six months of income and expenses. A debtor can therefore wait and refile in a later month if their situation is in flux.
Ready to Get Started?
Your first steps are to find an experienced Sarasota or Bradenton bankruptcy attorney and fulfill the bankruptcy counseling requirements. Alongside these to-dos is taking the means test early on.
Richard V. Ellis has helped hundreds of area residents through a bankruptcy filing. He is ready to assist you in determining your eligibility, as well as the best route for your specific situation. Call him today to learn more about your debt relief options.