What Is the Bankruptcy Means Test Used For?
Section 707(b)(2) of the Bankruptcy Code applies what is called a "means test" to determine whether a debtor's filing of a Chapter 7 would be presumed an abuse of the Bankruptcy Code, thereby requiring a conversion of the case to a Chapter 13.
Essentially, the "means test" was created to determine whether a debtor's income is low enough to qualify for a Chapter 7 bankruptcy. This formula was designed to keep debtors with higher incomes from filing a Chapter 7 bankruptcy. High income debtors who fail the means test must file a Chapter 13 bankruptcy, which allows them to repay a portion of debts over a period of 3 to 5 years, but they may not use the Chapter 7 to wipe out their unsecured debts altogether.
How to Pass the Means Test
Passing the means test does not mean that you have to be penniless to qualify for a Chapter 7. You can earn a significant amount of income and still pass the means test providing you have a lot of expenses.
Some expenses that might help you pass the means test can include:
- Large mortgage payment
- Large car payments
- Tax obligations
- Court-ordered payments such as alimony or child support
- Out-of-pocket healthcare expenses
- Care for disabled, ill or elderly household members
- Other expenses incurred due to special circumstances
The means test was specifically designed to limit the use of the Chapter 7 bankruptcy to those individuals who truly cannot afford to repay their debts. The means test deducts specific monthly expenses from the debtor's current monthly income (the debtor's average income over the six months prior to filing for bankruptcy) to arrive at the debtor's disposable income. The more disposable income, the less likely the debtor will qualify for a Chapter 7.
Can Business Debts Be Used?
The means test only applies to bankruptcy filers with primarily consumer debts and not business debts. When taking the means test, your Oakland bankruptcy attorney will first determine whether your income is above or below the median income of the state of California.
If your current monthly income is less than the median income for a household of your size in California, you automatically pass and you're done and you can file a Chapter 7. However, if your median income is higher than the threshold, your attorney will have to determine if you have enough left over to repay some of your debt.
Find Out Your Eligibility
At Kostopoulos Bankruptcy Law, we can help you apply the bankruptcy means test in order to determine if you qualify for a Chapter 7 bankruptcy. Our founder, attorney Rita Kostopoulos is a certified consumer bankruptcy specialist by the American Board of Certification and our firm was named among the Top 100 Firms by Debt Education and Certification Foundation (DECAF). We can sit down with you and determine if bankruptcy is right for you and if so, which Chapter you qualify for.
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