CHAPTER 7 MEANS TEST
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WHAT IS THE CHAPTER 7 MEANS TEST?
The Chapter 7 Means Test was designed to prevent abuse of the bankruptcy law. Namely, the test limits eligibility for Chapter 7 Bankruptcy to those who truly cannot repay their debts. The test accomplishes this by calculating whether your income is low enough to file Chapter 7. Those who pass the means test are able to file Chapter 7 to discharge their debts. For those who fail, Chapter 13 Bankruptcy is still a viable option that allows for partial repayment of debt.
HOW DOES THE CHAPTER 7 MEANS TEST WORK?
As mentioned earlier, the means test determines whether your income is low enough to qualify for Chapter 7 bankruptcy. The first step is to compare your income against the median income for a household of equal size in your state. If your income falls below the median, you pass the means test automatically. If your income exceeds the median, you must calculate your monthly disposable income in order to determine eligibility.
CALCULATING DISPOSABLE INCOME
The means test calculates disposable income using current monthly income and monthly expenses. According to the test, current monthly income is based on the average monthly income you received in the six months prior to filing.
Expenses that generally constitute as deductions include: taxes, health insurance, secured debt payments (mortgage and car), court ordered payments and so on. Furthermore, the test requires you to use national and local averages for a majority of the expenses instead of actual amounts. This prevents people from claiming a high expenses just to get out of repaying their debt.
The means test calculates disposable income by deducting monthly expenses from average monthly income. Disposable income is considered money that could theoretically apply to repayment of your unsecured debt. Therefore, if your disposable income exceeds a certain amount, there is the assumption that you can afford to repay your debt. In other words, a relatively high income would disqualify you from total liquidation of your debt. Those who fail the means test should consider Chapter 13 or other debt relief solutions.