The Chapter 7 Means Test is a qualifying test that a debtor must pass to be eligible to file a Chapter 7 bankruptcy. Most Chapter 7 debtors pass and are eligible for Chapter 7 relief. Note that there is a similar test for Chapter 13 bankruptcy. Also note that debtors who are married with children plus mortgage and car debt are more likely to pass than debtors with high incomes and no dependents and no mortgage debt.
The bankruptcy means test determines who can file for debt forgiveness through Chapter 7 bankruptcy. It takes into account your income, expenses and family size to determine whether you have enough disposable income to repay your debts. … Here’s how the test works and what it means for your bankruptcy case.
The means test involves a series of calculations with the aim of assessing whether a debtor has the ability to repay a certain amount to his or her creditors. It first considers the average gross income of the debtor for the six month period before the case is filed. It then compares the debtor’s average monthly income to the median income of a similar sized family in the same geographical area. Social security and disability payments are not considered income. The test is uniform throughout the states but certain adjustments are made on your geographic locale.
If you are below median then you automatically qualify for Chapter 7. If you are above median, then there are series of additional expense comparisons and considerations. For instance, deductions are further made for charitable contributions, car payments, mortgage payments, support obligations, and ongoing medical bills.
Every person’s situation is unique and can result in different outcomes on the means test. If a person only has tax or business debt, then he or she is exempt from the means test requirement. A corporation is also exempt from the means test requirement.
If you fail the means test, your case may be subject to dismissal unless you can explain why you still qualify for Chapter 7 bankruptcy relief. Another options is to just file or convert to Chapter 13 bankruptcy and make a percentage payment on your debts. A lot of times, the payment required in a Chapter 13 bankruptcy can be very small so that the effect is a “quasi Chapter 7 filing”. Debtor still is discharging all of the credit card debt as would have happened in Chapter 7 but just has to make a small monthly payment in Chapter 13 to make it work. The alternatives of not being in bankruptcy of having to deal with a debt consolidation/debt settlement company are worse.
For a review of your particular situation, call us at (925) 472-8000.