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What is the Bankruptcy Means Test?

If you have a debt, there are various ways of unshackling yourself from the debt. One of these ways is by filing for debt forgiveness, specifically through a Chapter 7 Bankruptcy. But do you know that not just anybody can file for the forgiveness of their debts? To be eligible for debt forgiveness, you have to pass a Bankruptcy Means Test. Which leads to the question of what is a Bankruptcy Means Test?

A Bankruptcy Means Test critically looks at some aspects of your life and uses them to decide whether or not you qualify for a Chapter 7 Bankruptcy, and ultimately, debt forgiveness. Some of these aspects that are reviewed critically include your expenses, income, and the size of your family (household). What does this hope to achieve? This is to determine if your disposable earnings are enough to pay your debts.

The Means Test is meant to disqualify people who have high earnings from filing for a Chapter 7 Bankruptcy and clearing their debt. This is well explained in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). In a nutshell, it calculates whether you can pay back part of what you owe.

What if you still want to retain some of your assets, say a house or a fancy car? Or that you are not eligible for Chapter 7 Bankruptcy? The next step should be to restructure your debts and make the payments through a Chapter 13 Bankruptcy.

Bankruptcy Means Test Estimate

We built a bankruptcy means test below to help you determine whether you may qualify for a Chapter 7. Please note that these are estimates, but hopefully you can use it for illustrative purposes.

 How Does the Bankruptcy Means Test Work?

 The means test has two sections, all designed for purposes of knowing whether you have any disposable earnings that can go to offset your debt. To be clear, the test is primarily for people with consumer debts such as medical and credit card debts.

The means test looks at your median monthly earnings for the half-year period before you filed for bankruptcy versus the average income of your state. In the same process, some factors, such as your expenses and both the local and national standards for specific living expenses, are taken into consideration.

The means test makes use of the information to decide whether any disposable earnings remain (after living expenses), which should go to your creditors. Now, depending on how much your income is, you might have to fill in the entire form, or you might sail through the test after a few simple stages.

If your earnings are below the average income for the state you live in, then filing for Chapter 7 bankruptcy will not be difficult. Remember that the median income is influenced by how big your household is. For more information regarding average income by state, check this table by the U.S Department of Justice.

What happens if you earn more than the state’s median? In such a case, the means test calculations get more complicated. Here, there can be three possible outcomes:

  • For a monthly income below state median, you may sail through the test and be eligible for Chapter 7 bankruptcy.
  • For a monthly income above state median,, you may not pass the means test, and you are advised to consider filing for Chapter 13 bankruptcy.

Passing the Bankruptcy Means Test (Income  < State Median)

Let’s say that your current earnings every month are not more than your state’s median income for the size of the household that you have. Or in simpler terms, your monthly income is less than the average income in your state. This means that you have passed the means test in the first stage and that you do not have to finish the rest of the test. It also implies that you can go ahead and file for Chapter 7 Bankruptcy.

It is vital to note that merely acing the test doesn’t mean that you automatically qualify for Chapter 7 bankruptcy. There are a couple of forms that the court will have to check. These are Schedule J: Your Expenses and Schedule I: Your Income. In case there remains any amount after your actual monthly expenditures have been deducted from your current monthly earnings, then Chapter 7 might be switched to a Chapter 13

Finally, keep in mind that just because you are eligible for a Chapter 7 automatically means that you must file for bankruptcy. It means that you can, but you have to consider other factors.

Not Passing the Bankruptcy Means Test (Income > State Median)

On the other hand, what happens to debtors who have above-median earnings? If your average earnings are higher than the median income of the state that you reside, this means that you don’t automatically pass the means test.

Interestingly, the above scenario also doesn’t imply that you automatically fail in the test either. It means that the process just got more complex and that you will have to fill the complete means test application. In this case, you must fill in amounts for your expenses:

Using IRS Accepted Figures is a Must

For some living expenses such as utilities, food, gas, and rent, the means test will consider where you live against both local and national standards when deciding your disposable earnings. What this means is that even if your real expenses for expenses are higher than allowed figures, you cannot use it to your advantage to reduce your disposable income.

You Can Use Actual Figures For Some Expenses

For expenses like car payments, childcare, mortgages, health insurance, taxes to mention but a few, you can pass the means test by deducting the actual expenses. For instance, let’s say that you are a high-earnings debtor. Do you know that you can still pass the means test if you also have a massive mortgage expense? Yes! This is because you can deduct the full mortgage amount from your earnings on the means test.

Final Thoughts

A Bankruptcy Means Test is the gateway to debt forgiveness via a Chapter 7 Bankruptcy. What this means is that if you pass the means test, you can file for bankruptcy and be well on your way to debt forgiveness.

Remember, when taking the means test, it is a must that you use a state average income for a household that is the same size as your household. For instance, if your family consists of 4 members, use the median income for families with four members within your state.

But what is the next best avenue to follow if you do not pass the means test? By now, you know that if you fail the test, you cannot proceed to file a Chapter 7 bankruptcy. Well, all is not lost as you can still go ahead and take advantage of a Chapter 13 bankruptcy. But if you go the Chapter 13 way, you will have to pay a part of your debts.

Post Author: Ascend

Ascend is a group of guest writers and industry experts who are passionate about personal finance and about helping people get and stay out of debt.

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