Chapter 7 Means Testing Explained
Filing for bankruptcy enables a person to rid themselves of debt, halt annoying creditor calls, and even stop the foreclosure of their home. Filing for bankruptcy has helped countless individuals just like you, get out of debt, and get on with their lives. However, bankruptcy filing must be done correctly and in an educated manner, or you might end up with more problems than you had in the first place. Before you jump the gun on thinking about filing, you should inform yourself about the “Means Test,” a critical evaluation that gauges your worthiness for bankruptcy.
What is a Chapter 7 Means Test?
It is a formula designed to keep filers with higher incomes from filing for Chapter 7 bankruptcy, in an attempt to wipe out their debts completely. The Means Test was added in a new bankruptcy law that was passed in 2005.
A person can file for Chapter 7 Bankruptcy, only if their monthly income is less than the median income in their state of residence. Only those filers with primarily consumer debts need to take the Means Test. If the household income of the filer exceeds the state median, the Means Test calculations become a bit more complicated. With these cases, the disposable income is calculated by subtracting certain monthly expenses from the filer’s current monthly income.
Purpose of the Test
The whole point of the Means Test is to secure Chapter 7 bankruptcy for an individual who has absolutely no way of paying back their debts. A local bankruptcy lawyer might need to become involved in the test in order to determine if the filer qualifies for Chapter 7 bankruptcy.
Requirements for Filers
- obtain debt management counseling.
- take an approved credit counseling course within the 6 months before filing a Chapter 7 bankruptcy petition.
- work with agencies that have been approved by the U.S. Trustee Program.
Failure of the Test
In the case that a filer doesn’t pass the chapter 7 bankruptcy Means Test, they can still apply for Chapter 13. Unlike Chapter 7 bankruptcy, Chapter 13 bankruptcy requires monthly payments over a three or five-year span.
Although it’s commonly thought, it’s not necessary for the filer to be literally “penniless,” in order qualify for Chapter 7 bankruptcy. If they have a great deal of expenses ( high mortgage payments), they can qualify for bankruptcy, despite earning a significant income.