Before filing for bankruptcy, individuals must submit to a bankruptcy means test. The purpose of the test is to determine if the person has enough disposable income to file a Chapter 13.
The bankruptcy means test is an important aspect to understanding which chapter filing of bankruptcy is most likely to fit your particular situation.
This test determines the income level—the “financial means”—of any individual seeking to file bankruptcy.
The means test formula was originally designed to ensure high-income earners file Chapter 13. Courts use it to determine if your income is low enough to qualify you for filing Chapter 7.
They will also use it to help decide on payment plans in Chapter 13.
Do you have enough monthly disposable income after paying your expenses in order to pay back your debt?
The bankruptcy means test seeks to determine the answer. It works by deducting specific monthly expenses from your “current monthly income.” This will determine your monthly “disposable income.”
The test uses average income over the six months before you file for bankruptcy in order to make this determination.
Courts essentially use this bankruptcy means test to make sure the burden of debt repayment is substantial when compared to your income in relation to your monthly expenses.
It was designed to limit the use of Chapter 7 bankruptcy for certain people. Specifically, it is for those who are able to repay their debts.
A general rule of thumb is that the higher the disposable income, the less likely you can use Chapter 7.
Instead, courts will expect you to use your disposable income to repay creditors.
However, it is important to realize that just because you have to take the bankruptcy means test, doesn’t mean that you must be living at the “poverty level” in order to file for Chapter 7.
You can earn significant monthly income and still qualify for Chapter 7 bankruptcy. For example, if you have a large number of expenses, a high mortgage, multiple car loan payments, or other expenses.
Most people who file for bankruptcy find Chapter 7 ideal because it requires no repayment.
However, without passing the means test, you’re likely going to be limited to using Chapter 13 bankruptcy, which requires monthly payments to be made over the course of a three to five-year period.
Remember that the means test takes into account your last 6 months of income.
So, if you can wait a period of time before filing, you can take the test again if you and your bankruptcy attorney feel that you can meet the threshold.
The decision to file for bankruptcy is a difficult and lengthy one that should not be done without the legal guidance of an attorney that you trust.
It’s important to seek professional legal advice when exploring the means test and before making a final decision on what will best suit your situation.
The attorneys at Parker & DuFresne can help. We will guide you through the entire bankruptcy process. Plus, we will give you the knowledge to build your credit afterward.
Contact us today for a free consultation.
Parker and DuFresne