If you are thinking about filing for personal bankruptcy protection, one of your first decisions will be whether to seek to permanently discharge debt under Chapter 7 or to try to reorganize your debt under Chapter 13. Pursuant to the changes made to the bankruptcy laws more than a decade ago, much of that decision is taken out of your hands now, as you must submit to a “means test” in order to qualify for Chapter 7 bankruptcy protection. The purpose of the means test is to ascertain whether you will have the financial resources to repay your creditors over a three to five year period. If so, you won’t be able to pursue Chapter 7.
The means test is essentially a formula that ensures that anyone with sufficient income repay debts rather than having them wiped out. To make that determination, the means test looks at your “current monthly income,” i.e., your average income for the six months immediately prior to filing your petition. The test will also look at your expenses to determine how much “disposable” income you have. The more disposable income, the greater the likelihood that you’ll prohibited from filing Chapter 7. The income limits vary from state to state.
Before looking at your disposable income, though, the test compares your “current monthly income” with the median income for a household of your size in your state. If your current monthly income is below that median, you’ve passed the test and can file for Chapter 7 protection.
If, however, your currently monthly income is above the median, you must determine if you have enough disposable income to repay your debts. To make this calculation, you subtract any “allowed” monthly expenses to come to your disposable income.
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