Chapter 7 and Chapter 13 Bankruptcy Means Test

What is a Bankruptcy Means Test?

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.

There is a debt solution for you and our firm offers free consultations to determine the right course of action. Debt resolution is our goal and finding the most appropriate solution for you is our priority. Call us today at 866-261-8282 to speak to one of our qualified bankruptcy attorneys or schedule an appointment at one of our six office locations in Detroit, Ann Arbor, Dearborn, Southfield, Flint or Warren, Michigan.

There are two steps to the process.

• Median Income Assessment
• Calculation of Disposable Income

The first 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 determination.

The second step involves determining if you have “projected disposable income.”  This determination is made by taking various allowed deductions set out 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.

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.

The Chapter 13 also provides other unique benefits over a Chapter 7 such as:

• Removing a second mortgage or home equity loan.
• Protection from home foreclosure with reasonable repayment terms to get back on track with your mortgage company.
• Improved credit throughout the repayment process.

Will I qualify to file for bankruptcy?

The answer is yes, 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 is our area of expertise. We encourage you to consult with one of our qualified bankruptcy lawyers to discuss all of your budget and goals. We will evaluate your circumstances and develop an action plan to resolve your debts.

We offer free in-office or phone consultations to review your personal circumstances, analyze your situation and advise you on the best course of action.  We specialize in bankruptcy law, debt resolution, foreclosure prevention and credit repair. We have offices in Detroit, Southfield, Dearborn, Flint, Ann Arbor and Warren, Michigan. Please call us toll free at 866-261-8282 or click here to schedule a consultation right now.