Before a debtor can be considered eligible to file Chapter 7 bankruptcy he or she must first pass the “means test.” Below we discuss what this is, how it works, and what requirements need to be met before a debtor can file Chapter 7 bankruptcy.
The Means Test
The main purpose of the means test is to identify who is able to file Chapter 7. Some debtor’s incomes are too high, thus disqualifying them from being able to wipe out their debt in Chapter 7 bankruptcy. Typically, those debtors with higher incomes are required to file Chapter 13. The means test calculates whether a debtor has the “means” to pay back at least a portion of the debt that is owed to creditors.
How Means Test Works
The means test compares a debtor’s average monthly income from the six-month period prior to the bankruptcy filing against the median income of the state that the bankruptcy was filed it. The means test also takes into account the debtor’s expenses as well as the national and local standards for living expenses.
That information is then used to determine if a debtor has any disposable income (money leftover after living expenses have been factored in) that can be paid to creditors.
Sometimes, based on the amount of income a debtor receives, the means test is automatically passed with just a few simple steps. Sometimes debtors must complete the entire form before the test can determine eligibility.
Passing The Means Test
The means test is greatly dependent on the comparison between a debtor’s income and the state’s median income level. A debtor will be required to compare his or her income to the state’s median income for a household of the same size as the debtor’s. That means if a debtor has a family of four, the debtor will need to compare to the median income for a family of four in the state they are filing.
Not Passing the Means Test
Just because a debtor does not pass the means test, that does not bar them from filing for bankruptcy. Chances are a debtor will be able to file Chapter 13 bankruptcy, which means he or she will most likely still be required to pay back a portion of funds to creditors.
For more information on if you should file for Chapter 7 or Chapter 13, it’s advised that you work with a bankruptcy attorney.
Working with a Bankruptcy Attorney
Bankruptcy can be an overwhelming process. That’s why we advise that you work with a phoenix business bankruptcy lawyer that is familiar with various debt repayment options. We are committed to helping our clients understand their rights and options under the bankruptcy law and developing the debt relief solution that makes the most sense for each individual. We invite you to call (602) 648-3274 or contact our Arizona office to schedule a free initial consultation.
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