What happens if a debtor fails the Chapter 7 Bankruptcy means test?

If you are considering declaring bankruptcy or have reached the point where you are going to declare bankruptcy, you may be wondering what type of bankruptcy is appropriate for you.  There are two main types of bankruptcies for individuals: Chapter 7 and Chapter 13.  The type of bankruptcy you can declare is based on a calculation called the means test.

Chapter 7 is a bankruptcy where your unsecured debts are liquidated or eliminated.  This means that you do not have to pay the debt ever.  Unsecured debts commonly include credit card charges, membership dues, and utility bills.  Chapter 13 bankruptcy is a reorganization of your debts.  This bankruptcy means your debts are reorganized so you have three to five years to pay them.

For the average person considering bankruptcy who has little property and a significant portion of their debt is unsecured debt, Chapter 7 is the preferable bankruptcy option.  This is because it means they do not have to pay the unsecured debt ever, whereas Chapter 13 will require them to pay the debt, only it is paid over a period of time.

For many years, because of the advantage a Chapter 7 bankruptcy provides in eliminating debt over Chapter 13 bankruptcy, individuals with high incomes who technically had the means to pay their debt through a Chapter 13 bankruptcy were still choosing Chapter 7 bankruptcy.  Therefore, in 2005, Chapter 7 bankruptcy was changed to include a “means test.”  The means test was created specifically to prevent individuals with high income from choosing Chapter 7 bankruptcy.

Chapter 7 Means Test

1. Are you earning more than the average income for your state?  If your answer is no, you can use Chapter 7 bankruptcy.  Otherwise, you must answer question

2. Do you have extra income greater than $166 per month to pay $10,000 in debt over five years?  If your answer is yes, you cannot use Chapter 7 bankruptcy.  Otherwise, you must answer question 3.

3. Do you have extra income greater than $100 per month to pay at least 25% of your unsecured debt over the next five years?  If your answer is yes, you cannot use Chapter 7 bankruptcy.  Otherwise, you can declare Chapter 7 bankruptcy.

If you fail the questions above, you cannot declare Chapter 7 bankruptcy.  Even if your monthly expenses exceed or equal your net income, so from your standpoint you should be qualified to declare Chapter 7 bankruptcy, you may still fail the means test.  This is because the means test is based on your living expenses, which are generally a lower number than your total monthly expenses.

If you fail the means test, you still generally have the option of declaring Chapter 13 bankruptcy.

How can I determine whether I fail the means test?

Although the high-level steps for performing the means test are described above, obtaining the average income for your state, calculating your income and living expenses, and providing the proof you will need to support these numbers in court is complicated.  Therefore, you should obtain help in determining whether you pass or fail the means test from a bankruptcy attorney.  A bankruptcy attorney will have the knowledge and experience to accurately calculate the means test in your state for your situation, and if you pass the means test, will know what support is needed so that the calculation will stand up in a bankruptcy court.

If you complete the short form below, a bankruptcy attorney will perform a 100% confidential review of your situation free of charge and with no further obligation to you.  Therefore, please complete the form to get help with your bankruptcy today.

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Beth L. has been a contributing writer to websites since 2008. She has a background in Business Management and Management Information Systems and graduated from the University of Texas in 1996. Now she specializes in content development for legal entities for issues regarding bankruptcy, personal injury and Social Security Disability law.

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