Quick Answer: The bankruptcy means test determines eligibility for Chapter 7 versus Chapter 13 bankruptcy by comparing the debtor’s income to median income levels. Creditors implemented this test to prevent higher-income individuals from quickly discharging debts through Chapter 7, forcing them into Chapter 13 repayment plans instead.
In case you find yourself deep into debts, filing for bankruptcy could be one of the best options to consider and especially if you know that you cannot be able to repay your debts on time.
There are various things that one should understand however before filing for the process as this will help you understand your position as far as the ruling is concerned. Filing for bankruptcy can be a major way of rearranging your financial standings and this should therefore be viewed as a great option for everyone struggling with debts. With this having being said, it will be important to know that tools such as bankruptcy means test are necessary in determining whether you qualify for what type of bankruptcy filing.
In case you choose to file for bankruptcy, there are various things that you should also understand such as the impact it will have on your credit ratings. It will also be important to know that not all the debts that you have can be scrapped with bankruptcy and therefore you will have to deal with them. Let’s look at the role played by the bankruptcy means test in the filing of your case.
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How does it work?
One of the main purposes of the means test is to ensure that only those whose income is below a certain level of income do qualify for the correct type of bankruptcy filing. The means test was initiated by creditors who wanted to keep people from the chapter 7 bankruptcy where their debts could be discharged quickly. The chapter 7 bankruptcy allows people who pass the means test to wipe away their debts while those who fail the test can be able to repay a portion of their debts using the same chapter.
The bankruptcy means test can still be useful to high income earners who happen to have huge expenses such as the repayment of mortgage loans. The means test is designed to deduct some particular monthly expenditure from your income dating to 6 months prior to the filing of the bankruptcy application. This helps in the determination of your monthly disposable income which helps to establish whether you should be allowed to use chapter 7 bankruptcy or not.
Who should take the bankruptcy means test?
People with business debts do not need to take the bankruptcy means test but if you have some principal consumer debts, then you can use this test when filing for bankruptcy. You will need to consider whether your current income is low or higher than the medium income within the state which you live in.
In case you find out that your income is above the medium income in your state, you will need to determine whether your disposable income is enough to help you repay some of your unsecured debts after you have paid some of your primary monthly expenses. Those whose income is more than a given amount, may not be able to file for chapter 7 bankruptcy since they will have already failed the test. But a good bankruptcy attorney can evaluate the situation to see what additional factors may be included to help someone qualify for a chapter 7 bankruptcy.
Those who pass the means test do not have to necessarily file for Chapter 7 bankruptcy and it is always important to discuss the different options available with a bankruptcy lawyer. One of the options available includes the Chapter 13 bankruptcy which allows you to stop some of the debt collections such as those involving foreclosure. You should however seek to go through the entire process with the help of an attorney as it can be tricky and stressful if you choose to go it alone.
Before You Sign Anything: Run any debt relief contract through the free Contract Decoder to spot hidden fees and unfair terms. Check the company’s complaint history with the Scam-O-Meter.
Compare Your Real Options: Most debt relief companies won’t tell you about all your options — especially the ones they can’t profit from. Credit counseling has a 21-27% completion rate. Settlement resolves about 1% of enrolled debts fully. Bankruptcy has a 95% discharge rate — and protects your retirement. Take the Find Your Path quiz for a recommendation based on your actual numbers.
