The Bankruptcy Means Test: What It Is, Why It Matters?
If you are considering filing for Chapter 7 Bankruptcy, you will be required to complete the bankruptcy means test. This test is used to determine if your income qualifies you to file for this type of bankruptcy.
Chapter 7 is a type of bankruptcy in which the nonexempt possessions of the debtor are sold, or liquidate, in order to satisfy the amount owed. In order to qualify for Chapter7, however, debtors must have a limited income that falls below the state median or provide proof that the amount of disposable income you have each month is not enough to cover payments on your debt.
What Is The Means Test?
The bankruptcy means test was put in place in order to regulate who is able to file for Chapter 7 bankruptcy and limit the number of debtors who attempt to abuse bankruptcy. The means test was put into place in 2005 after Congress changed bankruptcy laws and added income requirements.
The means test is primarily used for individuals with mainly consumer debts such as credit card or medical bills. It is not always required for those with a majority of personal business related debt.
If it is determined that you have the means to make payments your debt rather liquidating your assets, you will not qualify for Chapter 7, however you can file for Chapter 13 bankruptcy instead.
How Does The Means Test Work?
The means test is comprised of two steps and uses a formula that takes into account your currently monthly income, the median income of your state for your household size, required payments, and other expenses. The goal of the means test is to determine if you have enough disposable income to be putting towards repaying your debt.
- Step 1: The first step in the means test process is to determine your household income in comparison to that of the state’s median. You will need to provide as much documentation as possible for the previous six months that can offer tangible proof of your income. The means test will also factor in any recent or upcoming changes in your income situation, including unemployment, new jobs, or changes in pay.
If you pass this step of the means test, your income qualifies you for Chapter 7 and you can continue in the process to do so. If your income does not pass step one, you will move on to the second part of the means test.
- Step 2: The second part of the means test will require those with an income higher than the state median, to provide documentation on their allowable expenses such as required monthly payments and necessary living costs. These amounts will be deducted from your monthly income to calculate the amount of disposable income you have that could be used to pay off debt.
There is a detailed list of what is considered an allowable expense at both the national and state levels. These expenses could include housing or vehicle payments, utility bills, and groceries among others.
During this step, you must be extremely detailed, careful, and honest. Mistakes in this portion of the means test are often to blame for cases being thrown out. If your disposable income is proven to be low enough, you will be allowed to proceed with your Chapter 7 bankruptcy filing. If not, you can shift gears and file for Chapter 13 instead.
If You Fail The Means Test
If you pass the means test, you are free to move forward in the Chapter 7 bankruptcy filing process. Be sure, however, that you speak to an experienced bankruptcy attorney who can advise you on the best course of action to take. They will look at the information on your means test results and help you decide on the path that will be most helpful to your individual situation.
If you fail the means test, you do not have the option to appeal, however, you can test again after six months have passed. If you prefer not to wait, you can file for Chapter 13 instead.
Las Vegas Chapter 7 Bankruptcy Filing
If you are considering filing for Chapter 7, Fair Fee Legal Services in Las Vegas can help. Our team of expert bankruptcy attorneys has over 50 years of combined law experience along with a detailed understanding of the Nevada bankruptcy process and Chapter 7 income requirements. Simply call, text, or email us today to take the first step towards a debt free future.