What is The Chapter 7 Means Test?
The means test was enacted to prevent high wage earners, who could otherwise afford to pay back their debts from filing bankruptcy. It is used as a shield to ensure individuals who really cannot pay back their debts are the only individuals filing for bankruptcy. The Bankruptcy Court believes that high wage earners who do not qualify under the means test, should at least pay “something” back to their creditors in a Chapter 13 repayment plan.
If your income is too high to qualify for a Chapter 7, but your monthly expenses exceed what you take home, you may still qualify under the Chapter 7 Means Test.
How Does the Means Test Work?
The means test determines if an individual filing bankruptcy qualifies for a Chapter 7. The means test is computed by comparing the filer’s average income for the past six months, to the median income for a household of the same size in the state the filer lives in.
If the filer’s income is less than the state median income, the debtor qualifies for a Chapter 7 bankruptcy. If, on the other hand, the filer’s income is above the state’s median income, the individual will need to move on to a second part of the means test to see if they qualify for a Chapter 7 bankruptcy. The second part of the means test deducts reasonable living expenses to see if there is any disposable income left over. If there is no disposable income left over, the person can file a Chapter 7. If there is disposable income left over, the Bankruptcy Court expects the disposable income to be used to pay back some of the creditors.
Does Everyone Have to Qualify Under the Means Test?
Most individuals who file bankruptcy must qualify under the chapter 7 means test. However, individuals who primarily have business debts are exempt from the means test. If the individual’s debt is more than 50% business debt, they will not have to pass the Means Test.
How Can I Determine If I Qualify under the Means Test?
If you want to determine if you qualify for a Chapter 7 bankruptcy, you may be able to do a simple online search for a “means test calculator.” There are many free calculators online to choose from. Make sure that if you choose to use a free online calculator, it has the correct figures for your State. Every State has a different Median income threshold and using the wrong calculator can cause you future problems.
If you do not feel comfortable calculating the means test on your own, you can hire a bankruptcy lawyer to help you. If you do not have the funds to hire a bankruptcy attorney, at the very least, go and speak with one. Many bankruptcy lawyers provide free consultations that you should take advantage of. At the initial consultation, a bankruptcy lawyer may be able to tell you whether they think you will qualify under the means test.
Chapter 7 bankruptcy Forms
Another way to determine if you are eligible to file a Chapter 7 bankruptcy, is by filling out the Chapter 7 Means Test forms. These forms can be found online in the U.S. Bankruptcy Court’s website.
What Forms Will I need?
Each form has online instructions that you can follow to help determine if you qualify. Keep in mind that these figures change periodically. Make sure that when filling out these forms, you use the most up to date version.
What If I Did not Pass the First Part of the Means Test?
If you passed the first part of the Means Test, you are done. If, however, you don’t initially pass the means test, you will need to go to the second part of the test. To do this, you will need to gather all your sources of income for the last six months. You will need your pay stubs, unemployment, disability, or any other proof of income you received in the last six months. You will then need to determine your average monthly income. You can do this by adding up all your income and dividing it by six, to get your monthly average.
Next, you will need to gather all of your monthly expenses. Make a list on a piece of paper to keep track of them. You can include expenses such as: mortgage payments, utility bills, car loan payments, etc.
Once you have your average monthly income and all your expenses, you will need to determine if, after deducting your monthly expenses, you still are left with disposable income. If your disposable income adds up to a certain number, you will have to file a Chapter 13 bankruptcy.
I Passed the Means Test
Passing the Chapter 7 Means Test is only the first step, towards eliminating your debt. Once you have determined that you passed the Means Test, you still have another hurdle to overcome. To qualify for a Chapter 7 bankruptcy, you will need to show the Court that you don’t have money to pay your creditors after paying your monthly expenses each month. To show the Court this, you will need to fill out forms I and J. Schedule I shows the Court your current monthly income while, schedule J, shows the Court your monthly expenses. The Court will look to see that you currently have no money left over each month. If you have income left over, the Court will want you to pay back your creditors.
I Did not Pass the Means Test:
If you did not pass the means test it’s okay! This just indicates that you make more money than the median income in the State you live in. Instead, you will need to file a Chapter 13 bankruptcy. A Chapter 13 bankruptcy is a 3-5-year repayment plan. Many individuals who file Chapter 13 bankruptcy, do not have to pay all their debts back. Instead, they pay back a portion of what they owe. Chapter 13 bankruptcy can be a good way to catch up on mortgage arrears, and secured debts. It also allows you to pay back your debt over time without interest and fees accruing.
Determining if you qualify under the Means Test is essential to making sure that you get your bankruptcy discharge. If you file a Chapter 7 bankruptcy, and do not qualify under the Means Test, your case will either be converted to a Chapter 13 or dismissed. If you are worried about whether you qualify, contact a local bankruptcy attorney who can help you.