To qualify for Chapter 7 bankruptcy, an individual must pass a means test. This method uses a calculation to determine whether a filer can afford to repay a portion of the debt he or she owes to creditors. Our South Florida bankruptcy attorneys are clarifying the means test and how it applies to those filing for Chapter 7.
The means test is used to establish whether the remaining amount of disposable income available should be used to repay creditors for unsecured debts. These arrears include credit cards, medical bills, and signature loans.
Understanding the Means Test
The first step is to compare the debtor’s last six months of income and compare it to the median income of the debtor’s family size and state of residency. If this requirement is met, the rest of the means test does not need to be completed before filing.
In the event that the household income surpasses the median, additional calculations must be taken into account to qualify. The information collected is used to identify whether or not an individual has enough disposable income to repay debts owed. Someone’s disposable income is determined by the amount of remaining funds, beyond allowable deductions for living expenses. If the debtor is under the allowed disposable income, then he or she can file a Chapter 7. If he or she is over the allowed disposable income, he or she must file a Chapter 13 repayment plan bankruptcy.
Select items are eligible for deduction when determining living expenses, such as mortgage and car payments, taxes, health insurance, and child care. For some expenses, the debtor must use the allowed expense based on IRS guidelines. For other expenses, the debtor may be allowed to use his or her actual expense.
“Failing” the Means Test
In the event that a debtor does not pass the means test for Chapter 7 bankruptcy, the individual can file a Chapter 13 instead. It is possible to attempt the means test again at a later time, for example, if the debtor’s income is high due to the seasonality of employment or the debtor loses his or her job.
An experienced bankruptcy attorney will help to evaluate available options whether the means test is passed or not. Contact The Law Offices of Kelley & Fulton today for a free consultation.