If you are considering bankruptcy, you will most likely encounter the term “means test.” This important step in the process helps determine your eligibility for Chapter 7 bankruptcy. Understanding what the means test entails and how it affects your bankruptcy filing is important.
What is the means test?
The means test determines whether your assets and income exceed the financial resources limit for legal aid. It is a two-step financial assessment comparing your income against your state’s median income. If your income falls below the median, you automatically qualify for Chapter 7 bankruptcy. However, if your income exceeds the median, you must complete a more detailed analysis of your expenses and debts.
This test aims to prevent high-income individuals from abusing the bankruptcy system. It ensures that those who can afford to repay their debts through a Chapter 13 repayment plan do so rather than having their debts discharged through Chapter 7.
The second step involves a means test calculation that uses Form 122A-2.
How does the means test calculation work?
To complete the means test, you must gather information about your income, expenses and debts. You also need to know about the following:
- Income calculation: The test considers your average monthly income over the six months preceding your bankruptcy filing. This includes wages, investments, rental income and other sources.
- Expense deduction: You can deduct certain expenses from your income, such as housing, food, clothing and healthcare expenses. Deductions are based on national and local standards, while others reflect your spending.
- Disposable income: After subtracting allowed expenses, the remaining amount is your disposable income. If this figure is low enough, you may qualify for Chapter 7 even if your initial income was above the state median.
If you do not pass the means test, you may need to consider filing for Chapter 13 bankruptcy. This option allows you to reorganize your debts and create a repayment plan over three to five years.
Understanding the means test is crucial when considering bankruptcy. It helps determine which type of bankruptcy you are eligible for and can significantly impact your financial future. If you are unsure about the means test or your bankruptcy options, consult a qualified bankruptcy attorney who can guide you through the process and help you make informed decisions.