Chapter 7 Bankruptcy and the Bankruptcy Means Test
Nearly 500,000 people filed for Chapter 7 bankruptcy in 2016. If you are considering declaring personal bankruptcy, you probably are trying to figure out whether you should choose Chapter 7 bankruptcy or Chapter 13. Obviously, there are many factors that will go into your decision; however, one of the main considerations you need to keep in mind is whether you qualify for Chapter 7 in the first place, something that is determined through a bankruptcy means test.
What Is a Bankruptcy Means Test?
In order to file for Chapter 7 bankruptcy, which leads to debt forgiveness, you must qualify first by passing the bankruptcy means test. In short, you have to show that given your income, expenses, and family size, you do not have enough disposable income to meet your debts. Clearly, the bankruptcy means test was meant to limit the number of people who can opt for Chapter 7. That being said, if you don’t pass the test or you just want to hold onto some of your assets, such as your house or car, you can file for Chapter 13 where your debts will get restructured.
How Does the Test Work?
Simply put, the test gauges how much disposable income you have by deducting your expenses from your income. Consequently, the higher your disposable income, the less likely it will be that you’ll qualify for Chapter 7 as you’ll be expected to repay your debtors using your disposable income. Hence, even if you don’t pass the test and have to go 
through Chapter 13, the test will prove instrumental in setting your payment schedule. All that being said, the test consists of two parts: 1. Step 1: To start with, the test takes a look at your household income over the past six months and compares it with the state’s median income. The test also takes into consideration any changes or fluctuations in your income. On the one hand, if your income is already lower than the state’s median income, you pass automatically. Conversely, just because your income is higher than the median doesn’t mean that things are over: There is still the second step. 2. Step 2: At this stage, you have to calculate all your expenses over the past six months, especially things that are considered “allowable expenses,” such as your rent, your groceries, your clothing, and your medical costs. All of these costs are affected by the size of your family as well as where you live. Once these expenses are calculated, they are deducted from your household income in order to arrive at your disposable income, and if it is low beyond a certain threshold, you can qualify for Chapter 7. It should be pointed out that this stage can be a bit tricky: There are a lot of things that have to be accounted for, and you need to be as thorough and as forthcoming as you can be. Otherwise, if you omit something or write down conflicting information, you risk having your case tossed out altogether.
What Happens After a Bankruptcy Means Test?
In the event of passing the test, you can go ahead and file for Chapter 7, and the majority of your unsecured debt will be wiped away. Nevertheless, you need to bear in mind that this might not be the best route for you, and you might find it preferable to pursue Chapter 13. This is the sort of conversation you ought to have with your bankruptcy attorney. However, if you fail the test, you can’t appeal the decision. Yet, this doesn’t mean that you are obligated to go for Chapter 13. Assuming that you can hold on a bit, six months exactly, you can take another stab at the test again. After all, the test looks at your income and expenses over the past six months. It goes without saying that this entire process is significantly easier if you have the right bankruptcy attorney by your side. Therefore, if you are thinking of filing for bankruptcy, do not hesitate to contact us at (856) 596-2828, and we will be happy to start you off with a free consultation. Alternatively, you can come visit our offices in Marlton, New Jersey.
