Know Your Chapter 7 Bankruptcy Pre-Filing Requirements
The Chapter 7 Means Test & What It Means to You
If you decide to file for Chapter 7 bankruptcy, the bankruptcy court will use a formula called the "means test" to determine if you qualify to file Chapter 7 bankruptcy. The idea behind the means test is to reserve Chapter 7 bankruptcy for people who cannot afford or don't have the "means" to pay their creditors.
The purpose of the Chapter 7 means test is to establish whether you are truly bankrupt or whether you actually have expendable income after paying your monthly expenses to make minimal payments to your creditors through a Chapter 13 bankruptcy plan.
Keep in mind: If you decide to work with a bankruptcy lawyer, he or she may assist you in compiling the information needed to determine your Chapter 7 eligibility.
Let us connect you with a local bankruptcy lawyer who can examine in greater detail the means test as it applies to you – simply fill out our bankruptcy lawyer contact form or call 1 (888) 632-0501, and we'll connect you with a nearby participating bankruptcy lawyer from our nationwide network of sponsoring bankruptcy attorneys.
Chapter 7 Means Test Rundown: What You Need to Know
The Bankruptcy Abuse Prevention and Consumer Protection Act, which was introduced into federal law in 2005, requires that every Chapter 7 bankruptcy applicant undergo the means test to determine whether they are eligible for this consumer bankruptcy protection.
The Chapter 7 means test is not as cumbersome as some people unfamiliar with the test may think; but it does involve an in-depth analysis of your finances. Remember, if you team up with a bankruptcy attorney, he or she can take care of the number crunching for you and give you a definitive opinion as to whether you're eligible to file for this bankruptcy protection.
Many of us get a bit nervous when we hear the word "test." But, with the Chapter 7 bankruptcy means test, there's little reason to panic because it's not your average "test."
The Chapter 7 bankruptcy means test is more of a formula that the court uses to determine whether you meet the criteria for filing bankruptcy under Chapter 7. With the Chapter 7 bankruptcy means test, you and/or your personal bankruptcy lawyer fills out means test forms that ask questions about your financial condition.
The Chapter 7 means test entails:
A Comparison of Your Income with the Median Income in Your State
This part of the analysis examines your monthly gross income average over the last six months to determine if it's below the median income in your state. If it is below the media income level in your state, you will be allowed to proceed with filing Chapter 7 bankruptcy.
For example, if you live in California and have four people in your family and your household income level is $60,000 a year, you could qualify to file Chapter 7 bankruptcy because your income is less than California's median income level of $77,014 for a four-person family.
Check out our State Median Income section to find out the median income level in your state.
But don't worry if your monthly income average is higher than your state's median income level—you simply need to move on to the next part of the means test and may still qualify for Chapter 7 bankruptcy.
A Calculation of Your Disposable Income and Unsecured Debts
If your income is above the median income in your state, you must move on to the next part of the means test, which entails a calculation of your disposable income and unsecured debts. If the court determines that you have little "disposable" income each month, then you'll be allowed to file Chapter 7 bankruptcy.
In this process, certain standard monthly allowable expenses (determined by the IRS) are deducted from your monthly income to reveal your "disposable" income. If you have more than $100 in monthly disposable income, and that $100 paid monthly is enough to pay more than 25 percent of your unsecured debt over the next five years, you "fail" the test and may have to file a Chapter 13 bankruptcy, repaying a portion of your debt.
However, if you don't have $100 in disposable income or you have disposable income greater than $100 a month, but $100 paid monthly wouldn't pay off 25 percent of your unsecured debt over five years, then you'll likely "pass" the test and may be able to file Chapter 7 bankruptcy.
If some of the details to the Chapter 7 means test appear to be intricate, it's because they can be in some cases. A personal bankruptcy lawyer can help you conduct your means test and help take you through the Chapter 7 means test process.
What Happens If You Don't Qualify to File Chapter 7 Bankruptcy?
Keep in mind that you may not know whether you qualify for filing Chapter 7 bankruptcy until you and your bankruptcy lawyer crunch some numbers with the Chapter 7 means test in mind.
If you take the test and find out that you didn't "pass" it, don't give up hope. There are other actions you may take to find debt relief. For example, Chapter 13 bankruptcy may be a good option for you.
Under Chapter 13 bankruptcy, you may be able to silence your creditors and get set up on a realistic repayment plan. For more information, please feel free to visit out sister Web site, Chapter13.Me.
If you find that you didn't qualify for Chapter 7 bankruptcy protection and you are looking for other ways to get out of debt, a bankruptcy lawyer may be a good person to talk to.
With that said, you should know that most people have found themselves eligible to file Chapter 7 bankruptcy under the means test since its inception in October 2005.
Got More Questions about the Chapter 7 Means Test? Talk to A Bankruptcy Lawyer!
Although Chapter7.Me provides you with comprehensive information about Chapter 7 bankruptcy and the Chapter 7 means test, you may have more questions about the bankruptcy process.
If you're wondering whether filing Chapter 7 bankruptcy is the right move for you, a bankruptcy attorney is a good source to turn to for bankruptcy advice.
Or, if you're already considering filing Chapter 7 bankruptcy and aren't sure what steps you should take to get the bankruptcy process started, a local bankruptcy lawyer may be able to help you further.
We don't claim to have all the answers for your specific circumstance—that's why we are sponsored by an extensive network of participating bankruptcy lawyers who may be able to help to help you.
Keep in mind that filing bankruptcy is just one road you can take to reach financial freedom—there are alternatives to filing Chapter 7 bankruptcy. A bankruptcy lawyer may provide you with specific insight and advise you on what choice may be best for you.
Connect to a local bankruptcy lawyer by filling out our free bankruptcy case evaluation form or by calling 1 (888) 632-0501.