What Is the Means Test for Chapter 7 Bankruptcy?

January 7, 2020Bankruptcy

When people fall on tough times and struggle to pay their bills, they often turn to Chapter 7 bankruptcy for relief. Chapter 7 clears away a lot of your unsecured debts and helps you reset your finances.

But first, you have to qualify for Chapter 7, and while many do, there are requirements for filing this form of bankruptcy: For example, you can’t have filed for a Chapter 7 bankruptcy in the past 8 years, and you need to first complete an individual or group credit counseling course from an approved credit counseling agency within 180 days before filing.

And you also have to take a means test, which is used to determine who can file for debt forgiveness through Chapter 7. To get a better sense of whether you’ll pass the means test, let’s take a closer look at how this test is administered.

What is the Chapter 7 Bankruptcy Means Test and Why Is it Important?

The bankruptcy means test determines who can file for debt forgiveness through Chapter 7, and it’s intended to prevent high earners from filing. In looking at your financial situation, it considers a variety of factors, including:

Your income
Expenses
Family size

The benefit of Chapter 7 bankruptcy is it stops creditors from collecting payments, garnishing your wages, or foreclosing on your home, but you may need to give up some of your possessions. The court will take legal possession of certain items and appoint a bankruptcy trustee to supervise the sale of that property, with the proceeds being used to repay your creditors. And some debts are not dischargeable through bankruptcy, such as:

Child support
Alimony
Court fees
Student Loans
and some tax debts.

Before you can get there, you need to go through the bankruptcy means test, which was designed to restrict the number of debtors who can get their debts forgiven through Chapter 7. There are two parts to the means test, and both aim to determine if you have any disposable income you could put toward paying off your debt.

These forms are often filled out by the applicant’s bankruptcy attorney as part of your overall bankruptcy filing with the court. And the good news is that most people who take the means test pass it easily. For those who don’t, and who still want to retain assets like a house or car, can opt instead to restructure their debts and pay them off through Chapter 13 bankruptcy.

How Do I Know if I’m Eligible for Chapter 7?

The means test really only applies to those with consumer debts. If you’re struggling to keep up with credit card debt or medical bills, Chapter 7 would apply. So let’s look at the two steps of the means test.

First, it checks your household income to be certain it’s below your state’s median income. You’ll need to provide documentation about your income over the past six months, with adjustments made for changes like the loss of a job or an injury that kept you out of work. Likewise, if you got a new job with a higher salary or a promotion, that’s going to factor in as well. Most applicants pass this first stage of the means test.

For those who don’t but still want to file for Chapter 7, there’s a second part of the test. This looks at your expenses, in particular, what’s called “allowable expenses.” That can include necessities such as:

Rent or mortgage payments
Groceries
Utilities
Clothing bills
and medical costs.

What’s left after they deduct your allowable expenses is what’s considered disposable income that can be used to pay off debt.

On this second step in the means test, your bankruptcy attorney will advise that’s it’s crucial to be as thorough as possible and not omit items — which can result in your filing getting rejected. Being forthright with your information is necessary. Your attorney is going to work with you to ensure your expenses are properly documented. If your disposable income is shown to be low enough, chances are you’ll still qualify for Chapter 7.

What Happens If I Pass the Bankruptcy Means Test?

At that point, you can proceed with Chapter 7 bankruptcy, which is going to forgive most of your unsecured debts, including your outstanding medical bills or credit card debt.

However, if you fail the means test, keep in mind there’s no appeals process. You can take the test again in six months if you believe your situation has gotten worse and you can now meet the threshold for Chapter 7 debt forgiveness.

And your other option at that point is to file for Chapter 13 bankruptcy and arrange to make monthly payments to repay your debts over three to five years according to a budget monitored by the court. Most people filing for bankruptcy prefer Chapter 7 since it requires no repayment.

Trust an Experienced Bankruptcy Attorney in Louisiana

When you’re considering this process, a good bankruptcy attorney can help you understand which approach to bankruptcy is going to work best for your situation.

Orum Young Law has more than 35 years helping the people of Northeastern Louisiana file for bankruptcy and regain control of their finances. In those 35 years, we have filed more than 20,000 cases and experienced unbelievable success. We help our clients understand the basic aspects of their case, including how to determine their expenses and handle any necessary filings.