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How the Chapter 7 bankruptcy means test works

| Mar 29, 2021 | Uncategorized

Debtors in Escondido, California, may get relief from certain debts by filing bankruptcy through liquidating assets in Chapter 7. Many debtors choose Chapter 7 because they get a quicker discharge, which is usually three to four months. However, a debtor must pass a Means Test to qualify for Chapter 7.

New bankruptcy law

Debtors must take the Means Test because Congress reformed bankruptcy under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Too many high-earners took advantage of Chapter 7 to avoid paying debts.

Passing the Means Test doesn’t mean debtors must have little or no income or assets to qualify. Debtors only need to include nonexempt assets on the petition, such as a second vehicle and real estate with enough equity. Debtors high expenses or secured debt, such as mortgages, may still qualify.

The Means Test

The Means Test applies a two-step calculation to determine if debtors meet eligibility. The court compares 12 months of the filer’s income to the median income of a similar size household in their state. Debtors with incomes below the median can qualify for Chapter 7.

If the debtor’s income surpasses the median, the court adds the debtor’s income and expenses from the past six months. The month the debtor files the case does not count toward the total, and delays could cause changes in income.

Debtors who have more than $136 of disposable income per month commonly don’t qualify, but some exemptions, such as business debts, could qualify them. The debtor may refile in six months if they expect a change in income.

Debtors who fail the Chapter 7 bankruptcy Means Test commonly get converted to Chapter 13. However, seeking legal advice may help them determine the best kind of bankruptcy before they file.