Eligibility for a chapter 7 bankruptcy filing is determined by the "means test." The test determines whether your income allows you to file. The means test is formula that keeps debtors with incomes over their state’s median from making a Chapter 7 bankruptcy filing. Higher income debtors who do not pass the means test may use Chapter 13 bankruptcy.A chapter 13 bankruptcy does not wipe out a filers debts altogether. Rather they must repay a portion of what they owe to their creditors.
Having to take the means test for a Chapter 7 doesn't mean that you must be destitute in order to file for a Chapter 7 bankruptcy. You can earn a monthly income equal or less than your state’s median and still qualify for Chapter 7 bankruptcy. If you have significant expenses, such as medical related, school related for your children,, or a high mortgage payment, then you might be eligible for a Chapter 7 bankruptcy filing even if you earn more than your state’s median income.
How Does the Means Test Work?
The Chapter 7 bankruptcy means test is meant to restrict the use of Chapter 7 bankruptcy filings to those who don’t have any excess income to pay their debts. The means test achieves this by deducting certain monthly expenses from the debtor’s current monthly income (double the average income over the six calendar months before filing for bankruptcy) to arrive at a debtor’s monthly disposable income. The more disposable income you have, the less likely it will be that you will be allowed to file a Chapter 7 bankruptcy.
Only bankruptcy filers with primarily consumer debts, not business debts, need to take the means test. To take the means test, you must first determine whether your income is more or less than the median income in your state. If you earn more than the median, you must figure out whether you would have enough left over, after subtracting certain expenses, to repay some of your debt.
Is the Debtor’s Income Greater Than Your State’s Median?
The first step is to see if the debtor’s current monthly income is more than the median income for a household of their size in their state. If it is less than the state median, you can file without more. Such a debtor is not required to complete the remaining sections of the means test.
If the household income exceeds the state median, the means test computation becomes more complicated. The debtor must determine whether they have enough income left over after paying the monthly expenses allowed by the Bankruptcy code to pay off at least some of their unsecured debts like credit card bills or medical expenses. If a debtor’s disposable income is greater than a predetermined amount they are not allowed to file for Chapter 7 bankruptcy.
Median income levels are different depending on the state and household size. Further, each county and metropolitan area has different sums allowed for categories of expenses like basic necessities, housing, medical costs, and transportation. While the calculation is very complicated, there are online calculators that can assist a debtor to determine if they are eligible to file a Chapter 7 bankruptcy.
Use an Online Calculator
The easy way to determine eligibility under the Chapter 7 means test, use an online means test calculator. There are many free products on the internet. All involve using a calculator that applies the income and expense standards for the debtor’s state, county, and region to determine eligibility. In order to use the calculator a debtor will have to supply information about their income and expense. However, the calculator will do the work without requiring the debtor to look up income and expense figures for their area and doing the math. And, if the debtor decides to file for Chapter7 bankruptcy, they can use these figures on the means test form, Official Form 22A.
If You Pass the Chapter 7 Means Test
A debtor who qualifies under the means test does not necessarily mean it is in their best interest to file for Chapter 7 bankruptcy. It just means that they can. The debtor should only file for Chapter 7 bankruptcy after considering alternatives.
If the debtor didn’t pass then they cannot file for a Chapter 7 bankruptcy and must use Chapter 13 bankruptcy. Chapter 13 requires a debtor to make monthly payments over a three to five-year period according to a strict budget monitored by the court. Chapter 7 bankruptcy is the preferred filing as it requires no repayment. However, Chapter 13 bankruptcy has advantages, such as the ability to cure a default on a mortgage
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If you find yourself caught up in the current economic downturn a Chapter 7 bankruptcy or Chapter 13 bankruptcy can give you a fresh financial start. Filing for Chapter 7 bankruptcy or Chapter 13 bankruptcy can help relieve the financial distress due to a job loss, illness, divorce, or wages that simply cannot keep up with the increased costs of living.
If you find yourself drowning in debt a Chapter 7 bankruptcy or a Chapter 13 bankruptcy can help get rid of your creditors. A Chapter 7 bankruptcy or a Chapter 13 bankruptcy can literally wipe out all of your credit card, medical or home mortgage debt and prevent foreclosure on your home or the repossession of your car.
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