Understanding the Chapter 7 Means Test
When filing for Chapter 7 Bankruptcy, most if not all of your assets are ordered sold by the Courts. When Trustee sells these assets, the proceeds are used to repay creditors. In other words, Chapter 7 Bankruptcy often means losing the assets you own.
Whenever someone files for Bankruptcy, he or she is subjected to a Means Test to determine whether the filer can indeed qualify under Chapter 7 or Chapter 13 bankruptcy rules. Here, we examine points that are specific to the Chapter 7 means test.
In terms of the Courts, the Chapter 7 Means Tests encompasses calculating the following:
1.Your average income over the past six months. 2.Whether your average personal is above or below the median income of the State. For example, if the State’s median income is $25,000, and yours is lower, you qualify for Chapter 7 bankruptcy. If your income is higher, than additional calculations need to be made.
If the average personal income is greater than the median, then the Chapter 7 means test proceeds further. This includes the following:
1. Calculations are made where the Courts will subtract allowable expenses from your actual income figure. This should produce more of a disposable income figure. With this more-accurate figure, the Courts will multiply it by 60 to get a total income value for the next 5 years. 2. Another comparison is made where the Courts will stack your 5-year income against the State’s median income. If your amount exceeds the median’s by $10,000, then you do not qualify for Chapter 7 (although you would most likely qualify for Chapter 13). In the event, however, that your 5-year figure exceeds the median, but your monthly income falls short, then you still qualify.
On top of all this, your disposable income figure should be no more than 25% of your total unsecured debt level. In the event that it is more, you will not qualify under the Chapter 7 Means Test and may have to seek protection under Chapter 13.
In order to determine whether you will qualify for Chapter 7, you can complete these steps at home and measure your 6 month average and 5 year figure against your State’s median figures. Of course, if your numbers are close to the median, it is still worthwhile to speak with a professional who will need to complete this step anyway.
Of course, Chapter 7 and Chapter 13 bankruptcy should only be a last resort given the short- and long-term damage it causes to your credit score, finances, and emotional state. If you have the ability to repay your debt on a fixed schedule, you should explore such options before resorting to bankruptcy.
Comments are closed.