While filing for bankruptcy provides a fresh start for individuals and businesses, the government wants to ensure that people aren't taking advantage of this financial lifeline. To do this, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 has made the standards for qualifying for a Chapter 7 bankruptcy more stringent. In short, this protection prevents people with relatively high incomes from taking advantage of Chapter 7 when they should have reorganized their repayment plan through Chapter 13. The tool used to determine this is what is known as the "means test." If the court determines that your income is too high for a Chapter 7 filing, your petition could be considered abusive.
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How the Means Test for Chapter 7 Works
The means test calculation for a Chapter 7 bankruptcy is the process the court uses to conclude whether or not you're eligible for this bankruptcy solution. By using this test, the government is able to help those who truly can't pay their debts by deducting monthly expenses from monthly income. These figures are taken from the average income and expenses six calendar months prior to filing for bankruptcy. There are two considerations for Chapter 7:
Median income. If your income is below your state's median income for a household your size, you completely qualify and don't need to complete the rest of the mean's test. Because your monthly income is less than the median, filing for bankruptcy is completely understandable. Disposable income. However, if your income is above the median income for a household your size in the state, the test will determine your disposable income - or the income that's left after your monthly expenses. There will be allotted amounts for housing, transportation, food, and other basic necessities - this is why the means test calculations are so difficult. If your disposable income is too high, you must file for a Chapter 13 instead of a Chapter 7.
What Happens if You Pass the Means Test
If you pass the means test, you're biggest consideration is whether or not filing for bankruptcy is right for you. Remember, just because you qualify for Chapter 7, it doesn't mean that you should go for it. Have you considered all your alternatives or is Chapter 7 truly your best solution? By truly examining your options, you'll ensure that you make the best decision for you, even if it means filing for bankruptcy.
If You Don't Pass the Means Test
On the other hand, failing the means test limits you to a Chapter 13 bankruptcy. Fortunately, you can reorganize the debt to make the monthly payments more manageable and less constricting on your budget. Filing for bankruptcy through Chapter 13 is a wise move for many people seeking to avoid other problems such as a mortgage default. Before making any decisions, however, be sure to seek the counsel of a bankruptcy attorney to determine the best course of action for you.
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