The Bankruptcy Means Test: What it Is and Why It Matters

The bankruptcy means a test will determine if you are eligible for Chapter 7 bankruptcy.

The bankruptcy means a test is used to determine who can file for Chapter 7 bankruptcy debt relief.

This test takes into consideration your income, family size, and expenses to determine if you have enough income to pay off your debts. It was created to limit the number of people who can file Chapter 7 bankruptcy. However, the majority of those who pass the means test do so easily.

If you don’t meet the criteria for Chapter 7, or if you want to keep certain assets, such as a house or an expensive car, you can opt to restructure your debts and file Chapter 13 bankruptcy.

This is how the test works, and what it means in your bankruptcy case.

How it works

The means test is a confusing and expensive process that reveals whether you are eligible for Chapter 7 bankruptcy.

The means test consists of two parts. Both are designed to determine if you have enough disposable income to pay off your debt. The form is usually completed by your bankruptcy attorney and submitted to the court along with all other filing papers.

This test is for people who have primarily consumer debts like credit cards or medical debt. You don’t need the means test if you have debt primarily from your business. The test is also used to determine the repayment schedule for Chapter 13 bankruptcy.

Step 1

The first section of the means test determines if your household income falls below your state’s median.

Begin by collecting as much documentation about your income for the past six months. The Department of Justice provides this chart. It will give you an estimate of the state’s median household income.

The means test is based only on the six most recent months. However, adjustments can be made for any recent or upcoming changes. For example, let’s say you were employed for four months in the last six months and are now unemployed. 

The income drop will be taken into account by the means test. If you have recently started a new job or are earning more, this will also be taken into account.

If your income is below the median, you can file Chapter 7 bankruptcy. It’s that simple.

According to data from the Executive Office for U.S. Trustees (a government agency that oversees the administration bankruptcies), only 12% of those who took the means test in 2013 passed it in the first phase.

There’s a second part to the test for those in the 12% who hope to file Chapter 7 and those who want to file Chapter 13.

Step 2

Keep track of your expenses for the past six months. Rent, groceries, and medical expenses are all examples of “allowable expenses.” The remaining income is considered disposable income, which could be used to pay off debt.

Make sure you are thorough. You can make critical mistakes here, like omitting items or listing conflicting amounts for a single expense. This could lead to your case being dismissed.

Matthew Olson, a California bankruptcy attorney, says that it can be complicated. “I don’t know anything about their financial situation or family circumstances, other than what they tell me.” However, consumers have a fair amount to answer for their information.

The IRS uses both national and local standards to determine what is permissible. The national standards apply to items such as clothing and housing, while the local standards are for expenses such as car payments and housing. Your lawyer will help you ensure that all expenses are properly documented.

Chapter 7 may still be available if your disposable income is low enough.

When determining the terms of your repayment plan, you will use the allowable expenses section of the test if you are filing Chapter 13 bankruptcy.

You Pass The Bankruptcy Means Test

The means test passes, and you can file for Chapter 7 bankruptcy. This will allow you to forgive most of your unsecured debts like credit card debt, medical bills, and credit cards. 

However, this doesn’t necessarily mean that it’s the best option for you. Nevertheless, you should be able to file Chapter 7 bankruptcy. First, however, you need to know the differences between Chapter 7 and Chapter 13.

It might be a better idea to file Chapter 13 bankruptcy. This type of bankruptcy allows for you to catch up on your debts, such as a mortgage, back taxes, and overdue loans, and also lets you keep your assets. 

Melissa Davey is a member of Stites & Harbison in Georgia, which provides creditor rights and bankruptcy services.

Davey states that Chapter 13 is the most popular option for debtors because it allows them to propose a plan to restructure their debt. Discuss your goals and situation with your bankruptcy attorney.

Failure to pass the means test will result in your exclusion

If you fail the means test, there is no appeals process. However, that doesn’t mean Chapter 13 is not an option. As long as you don’t file for too long, Chapter 13 may still be your best option.

Remember that the income and expenses used to fill out the means tests reflect your financial position for the past six months. If you believe your financial situation will be sufficient to allow Chapter 7 debt forgiveness, you can take the test again within six months.

If you cannot wait and cannot pass the means test and file bankruptcy, you will be limited to Chapter 13, and your debts will be paid over three to five years.

Next steps

The means test is an important step in filing for bankruptcy.

Once you have the answer, talk to your attorney about the best chapter for you. You can then work with your attorney to resolve your debts via bankruptcy.

It can be difficult to rebuild your credit after bankruptcy. However, financial tools such as secured credit cards and secured personal loans can help you offset the negative effects of bankruptcy on your credit reports and get you on the right track to rebuilding your finances.

 

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