What is the Bankruptcy Means Test?

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You may have thought your days of taking tests were over but if you’re considering filing for bankruptcy, there’s one you may need to take: The Bankruptcy Means Test. Don’t worry, the Bankruptcy Means Test isn’t one you’ll need a No. 2 pencil for. This test is used to determine whether or not you meet the qualifications to file for Chapter 7 Bankruptcy and was designed to keep people who can afford to pay their debts from filing Ch. 7.

Only those people whose income is higher than the median income of the state need to take the test; if your income is below the median, you qualify for Chapter 7. The function of any bankruptcy is to help those who can’t afford to pay their debt to get out of financial trouble, and this test is used to determine whether or not there is an ability to pay. The test looks at your entire household income over the previous six months. It finds your average monthly income during that time and multiplies it by 12 to get your average yearly income. Your current monthly income must include not only employment, but also any other source of income you may have such as rental properties, interest and dividends, unemployment income, or any other payments you receive.

The amount that is reasonable for expenses is based on national, state, and local averages obtained by the U.S. Census Bureau and the IRS, although any specific legal obligations will be considered too or expenses for your health situation. By subtracting your expenses from your income, you get the amount of available income you have left to pay your debts. If this is low enough, you’ll be eligible to file Chapter 7, but if not, you can file Chapter 13.

In Chapter 7, you may choose to have some or all of your non-exempt assets liquidated to pay towards your debts. There are specific exemptions for your homestead, your vehicle and other personal property. You don’t have to lose your things, non-exempt property can be repurchased from the Chapter 7 Trustee. Typically you can even choose to make payments over a 12 month term. Your debts are essentially wiped clean with no further payments going to your creditors. With Chapter 13, on the other hand, a reasonable payment plan is set up with your Chapter 13 Trustee that you’re responsible for paying, typically over a 3-5 year period. This is usually less than the original debt.

Remember, it is your debt. It may have been accumulated by careless spending practices or it may have been because of something over which you had little control such as a medical condition, a divorce, or job loss, but you’re still responsible for it, and if the means test concludes that you have the means to pay some of it, then you must do so.

Just because you are under the means test and qualify to file for Ch. 7 bankruptcy protection, it doesn’t necessarily mean that you should. Filing for any bankruptcy is detrimental to your credit, and Ch. 7 stays on your credit report the longest: 10 years, as opposed to 7 years for Ch. 13. The decision to file is best made with the help of an experienced bankruptcy attorney who can closely examine your finances and advise you as to what’s the best solution for your situation.

If you are over the means test, Ch. 13 may be an option, but again, an attorney specializing in bankruptcy can help you decide on the best path for you. Timing is important to note, however. Because the means test looks at income, it may mean that you may not qualify now but you may qualify in a month or two, if, for example, you lost your job or there’s some other significant change to your income.

At Miller, Hollander, & Jeda, bankruptcy is our main focus. For more than 35 years, we’ve been helping residents of Florida get a fresh financial start. Our highly-skilled attorneys can answer any questions about bankruptcy, as well as help you with the means test and determine which bankruptcy you may qualify for and which might work best for you. We work with you every step of the way to help you out of your difficult situation. Call Miller, Hollander, & Jeda for a free consultation at (239)775-2000 and get on the path to a better financial future.