Chapter 7 Bankruptcy Means Test: The Details
In October, 2005, new bankruptcy legislation was enacted. One of the requirements outlined by the laws was that anyone who wanted to file for Chapter 7 bankruptcy must first pass a Chapter 7 means test. The Chapter 7 means test determines, through various calculations, whether or not the applicant is financially capable of making the creditor payments necessary for a Chapter 13 bankruptcy filing. If the applicant does not have the means to do so, he or she qualifies for Chapter 7 bankruptcy.
The law was enacted to separate Chapter 13 bankruptcy law from Chapter 7 bankruptcy law. People can now file for Chapter 7 bankruptcy only if they have proven that they do not have the means to pay creditors. Those who eventually file for Chapter 13 bankruptcy will pay off at least some of their debts.
Two Steps in the Means Test
Step One: Median Income Comparison
The first part of the Chapter 7 bankruptcy means test is fairly straightforward. You must compare the income of your household to the median income of a family of equal size in your state. Because this figure varies significantly across the country, it is crucial to make sure you use an appropriate resource. Perhaps the easiest way to ensure you get an accurate comparison is to consult a bankruptcy attorney in your area, who will know how your income compares to the median. A lawyer can also assist you with the rest of the filing process.
If you discover that you do not fall below the median income level, don't worry. There are more criteria involved in determining if you can file for Chapter 7 bankruptcy. That's where the second part comes in.
Step Two: Calculation of Disposable Income and Unsecured Debts
Step two is actually composed of a few smaller steps. To begin, you must determine your "disposable income." This figure comes from subtracting those expenses considered "allowable" by the IRS from your total income. If this calculation yields a number less than $6,000 for the next five years ($100 per month), you qualify to file under Chapter 7.
If you find that your disposable income over the next five years will exceed $10,000, you will only be eligible to file under Chapter 7 if you can prove you have special circumstances. A local lawyer can explain this process to you in more detail and answer any questions you might have.
You may be wondering what happens to those whose disposable income is between $6,000 and $10,000. If this is the case, another calculation comes into play. You must compare your disposable income over the next five years to a percentage of your unsecured debts to determine whether or not you are in a position to make any significant repayment to your creditors. If your projected disposable income for the next five years is more than 25% of your non-priority, unsecured debts, you're grouped with those who have $10,000 in disposable income, and can only qualify for Chapter 7 bankruptcy under special circumstances. If your disposable income comes to less than 25% of your non-priority, unsecured debts, you can file for Chapter 7 bankruptcy. You effectively "pass" the means test.
Getting Help from a Bankruptcy Lawyer
The calculations involved in the Chapter 7 means test can be confusing. A local bankruptcy attorney can provide you with the resources and help you through the process of the means test. The terms and formulas involved in the means test can get tricky not only because of the terminology involved ("unsecured," "non-priority," "disposable," etc.) but because of the rules outlined by the IRS.
Despite the restrictions put into place by the new legislation, most people who pursue Chapter 7 bankruptcy are still eligible to file. A bankruptcy attorney near you can explain how the means test affects the choices available to you.
Learn More about the Chapter 7 Means Test!
If Chapter 7 sounds like a workable solution for you, you should get in touch with an experienced bankruptcy lawyer right away to begin calculating your financial statistics for the Chapter 7 means test. Fill out our free bankruptcy case evaluation form, and we'll put you in contact with a bankruptcy attorney near you for a no-obligation, free consultation.