Understanding the Chapter 7 Bankruptcy Means Test

While many people have heard of the bankruptcy “means test,” they are uncertain about what exactly this test includes. The means test is used to determine if a person’s income is low enough to qualify to file for Chapter 7 bankruptcy. The purpose of this test is to block individuals with higher salaries from filing for Chapter 7 bankruptcy. If a person is left unable to file for Chapter 7 bankruptcy, however, he or she can often use Chapter 13 bankruptcy to repay a debt. While some people believe otherwise, a person need not have spend every dollar he or she owns to qualify for Chapter 7 bankruptcy. Instead, if a person earns significant monthly income, that individual can still qualify for Chapter 7 bankruptcy if he or she has substantial expenses that fall above a certain threshold.

How the Chapter 7 Means Test Works

The means test was created to limit the use of Chapter 7 bankruptcy to individuals who are unable to pay their debts. The test deducts specific monthly expenses from a person’s current monthly income to determine that individual’s monthly disposable income. The higher a person’s disposable income, the more likely that individual will not be allowed to use Chapter 7 bankruptcy. The means test only applies to individuals with primarily consumer as opposed to business debts. To determine if the test applies to you, the second factor that you should consider is whether your income is more or less than the median income in your state. If a person earns above the median, that individual must determine whether they would have enough left after certain expenses are deducted to repay their debts. A skilled bankruptcy attorney can be helpful in determining how the means test would apply to a person and ultimately whether that individual would qualify for Chapter 7 bankruptcy.

Why are Business and Personal Debt Treated Differently?

As previously mentioned, the type of debts a person has — business or personal — influences whether that individual must take the means test. Business bankruptcy applies when the majority of a person’s debts are related to his or her business. Some debt, however, can be complex to place in a category. A person who initiates a personal bankruptcy but who also owns a business will likely also have both types of debt. If the person filing for bankruptcy primarily has personal debt, the bankruptcy will be classified as a consumer action even if some business debts are also involved.

Important Forms Used in Chapter 7 Bankruptcy

The Chapter 7 bankruptcy means test involves filling out Form 122A-1, which is used to determine how an individual’s income compares to the state’s median income. If a person’s income is above the median, he or she must fill out Form 122A-2, which involves deducting expenses to determine if the debtor has enough disposable income to pay any amount of money back to creditors.

If a Debtor Passes the Chapter 7 Means Test

Passing the means test does not mean that a person will automatically qualify for Chapter 7 bankruptcy. Instead, the court will then analyze two additional bankruptcy forms. These forms include Schedule I (income) and Schedule J (expenses). If it is determined that after deducting a person’s monthly expenses from his or her current income, the individual has enough left to pay an amount to creditors, it is possible that a court might convert that person’s case to Chapter 13 bankruptcy instead of Chapter 7. In some situations, even if a court determines that a person qualifies for Chapter 13 bankruptcy, there still might be better options. An experienced bankruptcy attorney can help you determine what the best options are in your case.

If a Debtor Does Not Pass the Chapter 7 Means Test

If a person does not pass the means test, he or she will be limited to filing Chapter 13 bankruptcy, which will require the individual to make monthly payments over several years period based on a court-ordered payment schedule. There are some unique advantages to filing for Chapter 13 bankruptcy, which include that this method is better for curing defaults on mortgages as well as repaying debts that will not go away in bankruptcy.

Speak with an Experienced Bankruptcy Lawyer

If you have questions about the type of bankruptcy for which you qualify, you should contact a knowledgeable bankruptcy lawyer. Do not hesitate to speak with Attorney Melanie Tavare — she has helped many people successfully navigate the bankruptcy process. Contact Attorney Melanie Tavare today to schedule a free initial consultation.