What is the means test in bankruptcy Chapter 7?

If you’re struggling with debt, bankruptcy may be able to provide you with the fresh start you’re looking for. Chapter 7 bankruptcies, also known as liquidation bankruptcy, enables you to get most of your consumer debts wiped and have your liabilities eliminated after completing the bankruptcy proceedings. Read on to learn more about the Chapter 7 bankruptcy process and how it works.

How does it work?

The means test is conducted to limit the number of debtors who can file for bankruptcy Chapter 7 according to bankruptcy law. During the means testing, your living expenses are subtracted from your current monthly income (which is the average income you received six months before filing).

If your disposable income is too high, you won’t be eligible to file bankruptcy Chapter 7. This is because the bankruptcy court deems it within your ability to repay your creditors for unsecured and secured debts. Instead, you can convert your bankruptcy case to a Chapter 13.

Note that only filers filing consumer bankruptcy (as opposed to business bankruptcy) are allowed to take the means test and file Chapter 13 bankruptcy. Moreover, the median income level with which your gross income is compared will vary from state-to-state, so consider these when preparing for a bankruptcy filing.

How do I pass the means test?

 As previously mentioned, the first step compares the disposable income of the debtor with a state median income for their household size. If your earnings fall below the median, you pass and won’t need to go through the rest of the means test.

If it’s above the income, you may still be able to pass the test. You’ll need to follow the means test calculation to determine the amount you have leftover after subtracting the allowed deductibles. If this amount exceeds a specified limit and is enough to pay off your creditor, you won’t be able to get a bankruptcy discharge through a Chapter 7 filing. Otherwise, you can start preparing your Chapter 7 bankruptcy petition.

What forms do I need for the means test?

The bankruptcy forms you need for means-testing are downloadable from the US Bankruptcy Court website. Filling out these forms can also help determine your eligibility to file bankruptcy in Chapter 7. Here are the forms you’ll need.

• Form 122A-1. This form is used to determine whether your income is below the median income for your state. If you qualify at this stage, you won’t need to fill out the remaining forms.
• Form 122A-2. This form is where you’ll deduct allowable expenses from your monthly earnings to see if you qualify for Chapter 7 after completing the means test calculation.
• Form 122A-1Supp. This form applies to certain members of the military and other applicants who qualify under bankruptcy exemptions and are exempted from the means test.

If you’re not sure which bankruptcy forms to fill out when filing bankruptcy, a bankruptcy petition preparer or a local bankruptcy lawyer can help you prepare all the necessary paperwork to ensure that you won’t have issues in your bankruptcy proceeding.

What do I do after means testing?

Passing the means test doesn’t automatically qualify you for Chapter 7 bankruptcy. Make sure to check whether you meet the debt limit for both secured and unsecured debts under the bankruptcy code. 

Furthermore, being eligible for bankruptcy doesn’t necessarily mean you should declare bankruptcy. Consult a reliable bankruptcy attorney to discuss your financial situation and determine if bankruptcy is the right debt relief option for you.

Once you’re sure that declaring bankruptcy is right for you, you can start gathering all the necessary paperwork and preparing your petition for bankruptcy. Check your state’s bankruptcy laws for more bankruptcy information on the requirements and bankruptcy procedure.

If you’re considering filing for bankruptcy, contact us at Cutler & Associates, Ltd. Our compassionate bankruptcy attorneys can evaluate your financial circumstances and discuss your debt relief options to help you make informed decisions regarding your financial future. Call us to request a free evaluation today!