The Chapter 7 Means Test
Overview of the Chapter 7 Means Test
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 you are financially capable of making creditor payments necessary for a Chapter 13 bankruptcy filing. If you do not have the means to do so, you qualify for Chapter 7 bankruptcy.
Two Part Test
The Chapter 7 Means Test entails two specific parts, a median income comparison and calculation of disposable income plus unsecured debts.
Part One: Median Income Comparison
The first part of the Chapter 7 bankruptcy means test is the median income comparison. 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.
Part 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.
If your disposable income is between $6,000.00 and $10,000.00, another calculation comes into play where 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.
Need Help From a Bankruptcy Attorney?
The calculations involved in the Chapter 7 means test can be confusing. A local bankruptcy attorney can help you throughout the means test process. 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.
If Chapter 7 sounds like a workable solution for you, get in touch with a bankruptcy lawyer right away. Give us a call at 877-421-3761 or 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.