Chapter 7 bankruptcy or liquidation bankruptcy is for people who cannot repay their loans. However, only people with extremely low incomes can file for this bankruptcy chapter. To be eligible for Chapter 7 bankruptcy, a means test is used to determine whether the bankruptcy filer can repay a portion of their debts through chapter 13 bankruptcy or not. Chapter 7 means test can also help people who earn significant monthly income but have high expenses, including mortgage and car loan payments and taxes that make it easy for them to qualify the Chapter 7 means test.
How does Means Test work?
The means test is used to determine whether your disposable income is sufficient to repay your creditors through a chapter 13 repayment plan. The monthly expenses are deducted from your income to calculate your disposable income. Suppose this disposable income is more than the state’s median income for a household of a similar number of individuals. In that case, you fail to qualify for the means test. Bankruptcy filers with majorly consumer debt are required to take the means test.
Points to keep in mind to determine whether you qualify for Means Test
- The first step is to determine if your current monthly income is less than the state’s median income for a household of your size. If it is, you pass the means test and can file for Chapter 7 bankruptcy.
- If your income exceeds the state median, you need to determine if the disposable income is sufficient to pay off a portion of your unsecured debts. If the disposable income is above a fixed amount, you fail the means test and cannot file for Chapter 7 bankruptcy.
Chapter 7 Means Test forms
Form 122A-1 – Here, you mention the statement of your current monthly income. This form determines whether your income is below the state’s median income or not. If you qualify for Chapter 7 bankruptcy, no other form is to be filled.
Form 122A-2 – If your income is above the state median, you need to fill out this form for means test calculation. This form calculates your disposable income to determine if you can pay for your chapter 13 bankruptcy plan.
Form 122A-1Supp. – Individuals who serve in the military do not have to take the means test. Instead, they need to fill out this form to determine if they are exempt from the Means test or not.
What happens if you pass the Means Test?
If you pass the Means test, the court checks your Schedule I (your income) and Schedule J (your expenses) to determine if you have sufficient disposable income to repay your creditors some amount. If that is possible, the court switches your Chapter 7 to a Chapter 13 bankruptcy.
What happens if you do not pass the Means Test?
In case you fail to qualify for the Means Test, you are left with the option of filing for Chapter 13 bankruptcy. In this chapter, you are required to make monthly payments to your creditors to clear your debts over a three- to five-year period. You can catch up on default mortgages and clear debts like taxes, child, and spousal support through the Chapter 13 repayment plan.