Chapter 7 Bankruptcy Means Test
Under the new bankruptcy law, people who file for Chapter 7 bankruptcy have to pass what is known as the "Chapter 7 means test".
About The Bankruptcy Means Test
The Chapter 7 means test is a formula applied to determine whether or not the consumer should have enough money available to make some minimal payment to creditors in a Chapter 13 bankruptcy plan.
The goal is to reserve Chapter 7 bankruptcy for those who really have no means to pay and to push those who have available income into Chapter 13 bankruptcy plans, so that their creditors will receive at least partial payment.
Read on to learn more, then talk to a bankruptcy lawyer about your eligibility to file bankruptcy:
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The Means Test is a Two-Step Process
Step One: Median Income Comparison
The first step in the Chapter 7 bankruptcy means test is simple: it compares your income to the median income in your state for a family the same size as yours.
The median income for your family size may differ dramatically depending upon where you live, and a bankruptcy lawyer can tell you whether you are above or below the applicable median income.
Check out our state median incomes table for more information.
If your income is higher than the median income, it doesn't necessarily mean that you can't file for Chapter 7 bankruptcy; it just triggers the second step in the test.
Step Two: Calculating Disposable Income and Unsecured Debts
The second step is a bit more complicated, and actually breaks down into separate pieces itself.
Certain allowable expenses (determined by IRS guidelines) are subtracted from your income to find your "disposable income."
If your projected disposable income over the next five years totals less than $6,000 ($100/month), you likely "pass" and can file under Chapter 7.
If your disposable income is greater than $10,000 over the next five years, a presumption arises that you don't really need to file for Chapter 7 bankruptcy and you may only be allowed to do so if you can demonstrate special circumstances.
In the gray area between $6,000 and $10,000, yet another calculation is often required.
This one compares your disposable income over the next five years to a percentage of your unsecured debt to determine whether any significant repayment to your creditors is possible.
If your disposable income over that five years is greater than 25 percent of your unsecured, non-priority debts, you'll probably find yourself in the same circumstances as if you'd had more than $10,000 in disposable income.
If your disposable income over a five year period is less than 25 percent of your unsecured, non-priority debts, you will likely "pass" the means test.
You Don't Have to Go Through the Chapter 7 Means Test Alone
A local bankruptcy attorney can crunch the numbers for you and tell you whether or not you qualify for Chapter 7 bankruptcy under the means test.
The calculation can be complex, not only because of the numerous steps that may be involved, but because it requires an understanding of the rules concerning how your income is calculated for means test purposes and which debts are classified as unsecured and non-priority.
Most people who want to file for Chapter 7 bankruptcy find that they are still eligible to do so. A local bankruptcy attorney can help you determine how the means test may affect your bankruptcy options.
More Information about the Chapter 7 Means Test
For more information on the Chapter 7 means test and the role it plays when filing bankruptcy, connect with a local bankruptcy lawyer, or visit one of the following pages:
- State Bankruptcy Laws: Find out what exemptions are allowed in your state and other rules governing bankruptcy filings.
- Median Income Table: Get the latest state median income levels for your state and family size.
- Bankruptcy Credit Counseling: Learn about the pre-bankruptcy requirement of credit counseling, or find a credit counselor near you.
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The above summary is not legal advice. Laws may have changed since our last update. For the latest information on bankruptcy laws, speak to a local bankruptcy lawyer in your state.