The means test is often the biggest hurdle for those considering a chapter 7 bankruptcy. But it can often be overcome, which opens up the ability to eliminate most debt in about four months. Read on to find out what the means test is, how it works, and whether you may be able to qualify for a chapter 7 bankruptcy.
What is the means test?
The “means test” is a formula used to determine whether your income is low enough in order to file chapter 7 bankruptcy. The means test is designed to force those who have the ability to repay all or a portion of their debt into a chapter 13. Does this mean that you have to be flat broke in order to file? No. In fact, you can earn a significant monthly income and still file chapter 7 bankruptcy provided that you have sufficient expenses, such as a mortgage, car payment, or taxes to offset your income.
How does the means test work?
The first step is to determine your “current monthly income,” which is your average gross income over the six calendar months prior to filing. Hence the reason why your attorney will ask you for six months of pay-stubs or other proof of income.
Next, your current monthly income is compared against the median income for a family of the same size and locale as your own. Median income levels are frequently updated through the U.S. Trustee. If your income is less than the median income, then congratulations! You’re done. You do not need to complete the rest of the means test and you can file chapter 7.
If your current monthly income is greater than the median, don’t worry just yet. The means test provides for certain “allowed” expenses to be deducted from your income to arrive at your “disposable income.” Each county and metropolitan region has different amounts for categories of allowed expenses such as basic necessities, housing, and transportation. As long as your disposable income is below a certain amount, then you’re in good shape to file chapter 7. If there is sufficient disposable income to repay a portion of your debt (like credit cards), then you’ll be looking at a chapter 13.
A quick way to check your eligibility for chapter 7.
One way to quickly check your eligibility for chapter 7 is to use an online means test calculator. Legalconsumer.com offers a simple online calculator.
The calculator requires some income and expense information, but it will save you the work of looking up income and expense figures for your area and doing the math. Keep in mind that the calculator can give you a quick idea of whether you may be eligible for chapter 7, but should not be used as a substitute for the advice and counsel of a competent legal professional.
What happens next?
Even if you find that you’re eligible for chapter 7, there’s still the question of whether filing is the right course of action at the time. A bankruptcy attorney can help evaluate your particular situation and advise you as to the timing and consequences of filing. Even if you believe you’re not eligible to file chapter 7, you may just find that you are able to pass the means test after all.