The bankruptcy means test was created to determine if the filing party’s income is low enough to qualify for Chapter 7 bankruptcy. The means test is a formula that is meant to keep individuals with higher incomes from filing for Chapter 7 bankruptcy. If someone takes the means test and fails, that person can still file for bankruptcy but under Chapter 13 filing.
Income is not the only qualifying factor when it comes to determining if one can file under Chapter 7. The debtor can have a higher income and still qualify if expenses outweigh income. If he or she has high mortgage and car loan payments, as well as other expenses, that person may still be able to file under Chapter 7.
Essentially filers who have primarily consumer debts and not business debts have to take the means test. It must first be determined if the person’s income is higher than what is the median income in his or her state.
The means test takes the filer’s income and deducts certain monthly expenses from what is known as the filer’s “current monthly income.” This income is figured out by averaging income over the six calendar months prior to when the individual filed for bankruptcy.
Once these expenses are deducted, the person is left with what is his or her monthly “disposable income.” If he or she has a high amount of disposable income, it is unlikely that person will be able to file for Chapter 7 bankruptcy.
If the filer’s monthly income is lower than the state’s median household income, that person can file for Chapter 7 without any question. However, when it is higher, sometimes that person will need to recalculate expenses to determine if an exception can be made.
For those individuals whose household income is over the state median, the next step would be consideration of disposable income. This income is what is left after paying off “allowed monthly” expenses, such as house payments, car payments, etc.
The rest of that disposable income is considered to be available to pay for credit card or other unsecured debts, which are usually the driving force behind why a debtor is filing for bankruptcy.
The cost of living varies across the country. Median income levels take into account the part of the country where the debtor lives, as well as household size and a number of other considerations. The figures change annually but can easily be located through an online search.
The Means Test is not the be all, end all of deciding to file for Chapter 7 bankruptcy. Just because someone can file does not mean he or she should. Other alternatives do exist, and these alternatives can be discussed with a qualified bankruptcy attorney before determining to file.
Hope is not completely lost if someone fails the Chapter 7 means test. All that means is the individual will not be able to do a liquidation bankruptcy through Chapter 7. He or she can still proceed to Chapter 13 bankruptcy.
This form of bankruptcy allows the debtor to work with the bankruptcy trustee in forming a repayment plan for certain debts, extending over a three to five year period. A budget is set by the court and monitored by the bankruptcy trustee.
While, yes, the debtor still has to make payments on debts, which is not as ideal as the complete liquidation of Chapter 7, Chapter 13 bankruptcy works well for those who are currently in default on a mortgage and wish to stay in the home.
An attorney will be able to walk the debtor through which option is best, and if Chapter 13 is best for that person’s particular situation, the means test is not necessary.
At RLC Lawyers & Consultants, we are here to walk you through this stressful process of bankruptcy. To request to schedule a free consultation, please call us at (561) 571-9610 today.