The Means Test For Chapter 7 Bankruptcy Eligibility

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The Means Test For Chapter 7 Bankruptcy Eligibility

Bankruptcy has different Chapters which can have certain benefits or disadvantages depending on the specific financial condition of an individual. The first step before deciding on filing for bankruptcy is to analyze the eligibility aspects. An individual can qualify for one or more Chapters simultaneously or there could be some adjustments made based on the suggestions of reliable attorney to qualify for beneficial bankruptcy code. Recovery Law Group can not only help you find an excellent attorney but can also guide you through with some basics of bankruptcy and its Chapters.

Chapter 7 ideology

Chapter 7 is based on the idea of releasing debts with all disposable assets. Apart from basic assets, all assets are liquidated to pay off as many dues as possible and the remainder shall be discharged or wiped out. This is usually the last resort for people when they console themselves to lose some of their assets and wipe out other debts in order to fresh start a new financial journey. However, with some exemptions and ability to safeguard some essential assets, it can be more than handy under most circumstances.

‘Means’ test and Median

A means test is an eligibility criterion which has been put to use to make Chapter 7 accessible only to poor people. Due to misuse of Chapter 7 by average and upper-income individuals, a means test clause was introduced several years back. In order to verify eligibility with respect to the Means test, one has to calculate his/her household disposable income. This disposable income is calculated using the average income in the recent 6 months less some of the standard deductions associated with the basic necessities that have been pre-defined by the state regulations or the federal regulations. The actual expenditure is disregarded, and the state standard deductions are to be applied under most circumstances. Higher the disposable income, the lower the chances of qualifying for Chapter 7.

The means test is applicable for all filers except the business bankruptcy filers. The calculation for disposable income can be skipped if your income is below the state or federal median, whichever your bankruptcy court follows or approves. Only if your income is above the state median, will you need to chart out disposable income and the standard exemptions.

Court’s intervention

Under rare circumstances, even if you pass the means test, the court might switch you to Chapter 13 if your actual expenses are lower than the availed standard exemptions. Sometimes, you might not qualify for all types of exemptions and hence, the court has every right to review the exemptions or deductions claimed and make necessary adjustments if required. Different forms are available at your disposable like the Form 122A-1, For, 122A-2 and Form 122A-1 Supp for calculating your disposable income for the means test.

Business Chapter 7 bankruptcy

The biggest advantage for a business or a sole proprietor with business debt is that they do not have to go through the complicated means or median test. A business could be LLP, corporation or a partnership. For a sole proprietor, it can be tedious to acknowledge whether he is a business debtor or a consumer debtor. If the sole proprietor has debts that are predominantly of business nature say above 90%, he/she will be considered as a business debtor. On the other hand, if consumer debts are higher, the sole proprietor also might have to undergo means test and qualify similar to an individual for a Chapter 7 bankruptcy California.

For more insight on this and many more bankruptcy-related topics dial in the professionals on 888-297-6203.