Bankruptcy can be life-changing. It’s a legal process where an individual or a business declares that they are unable to pay off their debts. It’s not a decision to be taken lightly, and it comes with a range of consequences.
One of the more complicated aspects of the bankruptcy process is the means test. This test is a way to determine whether an individual or a family is eligible to file for Chapter 7 bankruptcy.
Before we dive into the means test, let’s talk about Chapter 7 bankruptcy. Chapter 7 bankruptcy is a type of bankruptcy that allows individuals to eliminate most of their unsecured debts, such as credit card debt and medical bills. It’s also known as a “liquidation bankruptcy” because the debtor’s non-exempt assets are sold to pay off creditors. Not everyone is eligible to file for Chapter 7, though. You need to pass the means test first.
What is the Bankruptcy Means Test?
The bankruptcy means test is a calculation used to determine whether you qualify for Chapter 7 bankruptcy. It compares your income to the median income in your state for a family of your size. If your income is lower than the median, you automatically qualify for Chapter 7. If it’s higher, you’ll need to go through further calculations to see if you still qualify.
To calculate your income, the means test looks at your average gross income for the six months prior to your bankruptcy filing. If your income varies from month to month, they’ll use an average of six months.
If your income is below the median, you’re in the clear. You’ve passed the means test, and you’re eligible for Chapter 7 bankruptcy. If your income is above the median, it gets a bit more complicated.
If your income is above the median, you’ll need to go through additional calculations to see if you still qualify for Chapter 7 bankruptcy.
The next step is to subtract certain expenses from your income. These expenses aren’t your actual expenses; they’re expenses set by the IRS. They include things like national standards for food, clothing and other items, as well as housing and transportation expenses.
If your income minus these expenses is below a certain amount, you still qualify for Chapter 7 bankruptcy. If it’s above that amount, you may have to file for Chapter 13 bankruptcy instead.
Chapter 13 bankruptcy is a type of bankruptcy where you create a payment plan to pay off your debts over a period of three to five years. It’s less severe than Chapter 7 bankruptcy because you get to keep your assets.
There are some exceptions to the bankruptcy means test.
- If the majority of your debts are business debts, you may be able to skip the means test altogether and file for Chapter 7 bankruptcy.
- If your debts are primarily non-consumer debts, such as taxes or debts from a criminal act, you may also be able to skip the means test.
The bankruptcy means test is complicated, but it’s an essential part of the bankruptcy process. It’s designed to make sure that only those who need to file for Chapter 7 bankruptcy are able to do so. If you’re considering bankruptcy, it’s important to speak with a bankruptcy attorney in Decatur who can help you navigate the means test and determine which type of bankruptcy is right for you.