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What is a Means Test and How Does it Work?
When considering filing for bankruptcy, one of the most important steps is the means test. This test evaluates your financial situation to determine if you are eligible for Chapter 7 bankruptcy vs. Chapter 13 bankruptcy.
If you are considering filing for bankruptcy, speak with an experienced attorney at the Law Offices of Melanie Tavare to learn more about a means test and other elements of the filing process. Our Bay Area bankruptcy attorney can explain what a means test is and how it works, so you can make an informed decision about filing for bankruptcy.
What is a Means Test?
A means test is a two-part evaluation used by the government to identify individuals who have enough disposable income to pay off their debt through Chapter 13 bankruptcy (rather than be eligible for Chapter 7). The first part of the test looks at your income level relative to the median income in your state. If you make more than the median income in your state, then you must pass the second part of the means test. In order to calculate your disposable income for the purposes of the means test, you need to fill out Form 122A-2, which can be found on the official website of the U.S. Bankruptcy Court for the Central District of California.
What Happens if You Pass the Means Test?
If you pass the means test, then that means that you don’t have enough disposable income to pay off your debt through Chapter 13 bankruptcy. This makes you eligible for Chapter 7 bankruptcy, which allows debtors to discharge certain types of unsecured debts without having to repay them.
What Happens if You Fail the Means Test?
If you fail the means test, then that means that you have enough disposable income to pay off some or all of your debt through Chapter 13 bankruptcy. In this case, rather than discharging certain debts as with Chapter 7 bankruptcy, debtors are required to enter into a repayment plan with creditors over a period of three to five years. During this time, creditors cannot take legal action against debtors while they are repaying their debts.
Calculating Your Income and Determining Your Household Size
The first step in calculating your income is to determine your “Current Monthly Income” (CMI). This can be done by taking your average monthly income from the last six months prior to filing for bankruptcy and adding together any additional non-wage income received during this time period. Examples of non-wage income include child support payments, Social Security benefits, and pensions. Once you have calculated your CMI, you can then use this figure to determine if you meet the requirements for a Chapter 7 bankruptcy.
Your household size includes all individuals living with you who are financially dependent on you. This includes your spouse, children, parents, grandparents, and other dependents such as disabled family members who rely on you for financial support. You should also count any unborn children or those born within six months of filing as part of your household size calculation. It is important that all people living in your home are included when calculating your household size so that a true representation of how much income is available to pay off debt can be established.
Get Guidance From a Bankruptcy Attorney
The means test can be a complicated process, but it is an important component when deciding whether or not filing for bankruptcy is right for you. With careful consideration and proper guidance from attorney Melanie Tavare, you can file for either type of bankruptcy and enjoy a fresh financial start. Contact the Law Offices of Melanie Tavare today for a free case review. Call 510-255-4646.
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