When the consumer bankruptcy laws changed in October 2005, legislators added a requirement to further filter out who will qualify for a Chapter 7 Bankruptcy. This is known as the “Means Test.”
Simply put, this is a formula to determine if a person has any disposable income that may be available to pay creditors back through Chapter 13 reorganization instead of a Chapter 7 bankruptcy.
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What is the Process for a Means Test (H2)
Step 1: Median Income Comparison
The first step is a Median Income Comparison.This test compares your income to the median income in your area for a similarly sized family. The median income varies by area, so one of our qualified bankruptcy attorneys will be able to perform a median income comparison based on your specific information.
If you are below the median income, then you automatically pass the Means Test and are qualified, based on income, to file for Chapter 7 bankruptcy. If your income is over the median income, you still may qualify to file for Chapter 7, but would have to perform the second step in the Means test to make a final determination.
Step 2: Projected Disposable Income
The second step involves determining if you have “projected disposable income.” The purpose of this step is to calculate and determine if you have any disposable income to pay creditors. This determination is made by evaluating your income and calculating your expenses based on allowed deductions available in the bankruptcy code. These deductions make use of IRS guidelines in conjunction with your actual expenses for secured debt and other mandatory living expenses. After deducting the expenses from your gross income, it can be determined if and how much “projected disposable income” you have. This “projected disposable income” figure is used to calculate how much you are required to pay back to creditors in a Chapter 13. If there is negative “projected disposable income” you are likely qualified for Chapter 7.
Types of Bankruptcy Qualification
In addition to the Means Test, the Court will also look to your actual ability to pay based on your current monthly income and current monthly expenses. This process is designed to establish a monthly and total amount you are able to pay your creditors back through a Chapter 13 plan. This process allows you to deduct reasonable living expenses from your income.
If you have less than $200 a month left over after deducting the reasonable living expenses and you pass the Means Test, you will likely qualify to file for a Chapter 7 bankruptcy.
If you have more than $200 of disposable income left over after paying your reasonable living expenses, than the courts will want you to enter a Chapter 13 repayment plan.
Chapter 13 still allows you to eliminate a portion of your debts with favorable terms (0% interest on unsecured debts such as credit card and medical bills), but simply requires that you pay something (your “best efforts”) to your creditors for a timeframe of 36- 60 months. At the completion of the Chapter 13 plan, you would receive a similar discharge of debts as you would under a Chapter 7 bankruptcy. Learn more about the differences between Chapter 7 and Chapter 13 bankruptcy.
Get the Most Accurate Test Results
Acclaim Legal Services has up-to-date bankruptcy software to help us calculate your means test electronically and let you know the results on the spot. Our software constantly updates as allowable deductions and amounts frequently change. Therefore, you can be rest assured that you have the most accurate determination available.
Chances are that you will either qualify for a Chapter 7 or a Chapter 13 bankruptcy. What Chapter you qualify for and which program will best resolve your finances and meet your long-term financial goals is our area of expertise.
Call Acclaim Legal Services today to discuss your best option to resolve your debts with an experienced bankruptcy attorney at 866-261-8282 or schedule a free consoltation.