When an individual needs relief from the burden of debt, they generally have two bankruptcy types available to them: Chapter 7 and Chapter 13. Because Chapter 7 bankruptcies offers debt forgiveness rather than a structured repayment plan, it is usually reserved for people with a lower income. Because of this, you must show the limitations of your income through a process called the means test in order to file for Chapter 7 bankruptcy.
How does the means test work?
Because the cost of living varies depending on where you live, the first stage in the means test is comparing your income to the median income in the state based on census data. Those who earn less than that income are automatically able to file for Chapter 7 bankruptcy.
Those whose income is more than the state’s median income can still pass the means test. They must document their monthly expenses and deduct their “allowable expenses” like rent, food and medical costs to determine their disposable income. If their disposable income is low enough, they may still be able to file for Chapter 7 bankruptcy.
What happens if you do not pass the means test?
Households with greater disposable income could still file for bankruptcy, but Chapter 7 bankruptcy will not be available based on their current information. To file for bankruptcy immediately, they can file for Chapter 13 bankruptcy and get debt relief through a repayment plan. Those who fail the means test can also wait to take the means test again in the future if they believe that their circumstances will change.
Passing the means test is only the first step toward filing for Chapter 7 bankruptcy. If you have further questions about bankruptcy and how it could lift the burden of your debt, speak to an experienced bankruptcy attorney to learn more.
