If you are considering filing for consumer bankruptcy, you may want to file for Chapter 7 bankruptcy to get out from under your debts more easily and quickly while avoiding an extended repayment plan. However, not everyone will pass the Chapter 7 bankruptcy means test that looks at your monthly income and other factors to determine eligibility. Robert Stiberman, a bankruptcy attorney in Florida, is breaking down what the means test is and how to determine if you are eligible.
What Is Chapter 7 Bankruptcy?
Before we dive into the means test, let’s look at precisely what Chapter 7 is and what it can mean for you. Chapter 7 bankruptcy allows you to liquidate much of your consumer debt. The bankruptcy court assigns a trustee who will gather your non-exempt valuables, such as non-retirement-related stocks, secondary vehicles, and savings accounts. Then they will sell any non-cash items and use the proceeds to pay off creditors in a debt settlement.
Much of the non-secured debt leftover, like credit card debt, medical bills, and personal loans, is discharged, so you are completely free from having to pay on them any longer or have your wages garnished to pay for them. It’s important to note that most student loans, business debt, and domestic debt, such as alimony and child support, cannot be discharged in Chapter 7 bankruptcy.
In order to file for this, you must prove, through a means test, that you do not have enough disposable income to pay off your consumer debt.
What Is the Chapter 7 Means Test?
The Chapter 7 bankruptcy means test is simply a determination, based on a specific formula, that an individual does not have the means, or disposable income, to pay their debts. The means test began in 2005 with the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act to prevent people with sufficient monthly income from avoiding paying their debts. If an individual is found to have disposable income, they can file for Chapter 13 bankruptcy to repay more of their debts.
How Does the Bankruptcy Means Test Work?
Determining whether you pass the Chapter 7 means test is a multi-step process in which your household income is compared to the median income of your state, then your household expenses are factored in to calculate your disposable income left over. Basically, if your income is less than the state’s median income for your family size, you will automatically pass the means test to file for Chapter 7 bankruptcy. If your household income exceeds the limit, further analysis of your expenses and identification of your disposable income are necessary to determine your eligibility for Chapter 7 bankruptcy.
Chapter 7 Means Test Part One: Determining Your Gross Income
First, you need to determine the relevant time period to look at your average income to begin your means test calculation. Specifically, you’re looking for the previous 6 months before the month you filed. For example, if you filed your case in May of 2022, the bankruptcy court would apply your means test from November 1, 2021, to April 30, 2022. Knowing the specific dates to base your means test calculation is very important, especially if your total monthly income fluctuates.
Next, you’ll need to determine your gross income, which is the entire household income you receive, including your paycheck, child support payments, alimony, or retirement income. It’s important to note that you do not have to include Social Security, including SSI and SSDI, for disabled members of your family. Also, veterans and active duty members of the armed forces do not have to include their military income or pension in their current monthly income calculation.
Don’t guess—use our Florida Means Test Calculator to see where you stand.
Chapter 7 Means Test Part 2: Comparing Your Income to the State Median Income
Once you have a clear view of your income over the previous six months, you can start filling out the means test form, though we recommend having a bankruptcy attorney assist you with your calculations to ensure accuracy. You’ll want to use the means test page on the United States Department of Justice’s website to find your state’s median income. Using the drop-down menu, you’ll find a link to the median income based on state and family size using data gathered by the Census Bureau. For example, in Florida, the median income for a family of four is $89,206, as of April 2022.
Chapter 7 Means Test Part 3: Determining Disposable Income
If your income exceeds the state median income for your household size, the next part of the means test states that if you have disposable income to pay at least 25 percent of your unsecured debt over five years, you can’t file for Chapter 7 bankruptcy. The types of expenses include:
- Food
- Clothing
- Health care costs
- Housing
- Utilities
- Transportation
- Payments to secured creditors (mortgage or car)
- Payments to priority creditors (student loans, tax debt, back child support)
You also need to know how much you owe towards unsecured debt in order to see if you can pay a minimum of 25 percent over a five-year period.
If your expenses exceed this capability, you will most likely pass the means test to file for Chapter 7 bankruptcy.
Read More: How To Pass The Chapter 7 Means Test
Schedule a Free Consultation with a Bankruptcy Attorney Today
If you are in need of debt relief, Chapter 7 bankruptcy may be the solution you need. Our team of dedicated Chapter 7 attorneys can help you determine whether you pass the means test and what the best options are for you moving forward. To schedule a free initial consultation, reach out to us today at 954-807-1562 or fill out the form below to get started.
