You will probably file a Chapter 7 bankruptcy or a Chapter 13 bankruptcy if you’re an individual looking for debt relief through bankruptcy.
Most unsecured obligations, including credit card and medical expenses, are dischargeable in Chapter 7 bankruptcy. In contrast, Chapter 13 bankruptcy enables a debtor to restructure their obligations through a court-approved repayment plan that typically lasts between three and five years. Unsecured debts that have not been fully repaid at the end of a Chapter 13 plan are dismissed. There are many variables that might affect whether you apply for Chapter 7 or Chapter 13, but the bankruptcy means test analysis is typically the deciding factor.
What Is The Means Test For Bankruptcy?
Your income is examined as part of the bankruptcy means test to determine if you qualify for Chapter 7 bankruptcy. The means test, which consists of two parts, is used to establish if you have enough discretionary income to pay off your obligations. It’s crucial to keep in mind that the means test is only required for those whose debts are predominantly consumer obligations and not corporate debts. Additionally, some military personnel and veterans are exempt from the means test.
How Does The Means Test For Bankruptcy Operate?
- The means test’s initial step compares your current monthly income to the median income in your state for a household of your size.
- Check the relevant table on the U.S. Trustee Program page as median income levels vary by state and household size. Your gross monthly income for the six months prior to declaring bankruptcy is multiplied by two to determine your current monthly income.
- You pass the means test and can apply for Chapter 7 bankruptcy if your monthly income is below the median.
- At this initial stage, the majority of persons (over 80%) pass the means test.
- You may still be eligible to apply for Chapter 7 bankruptcy if your income is higher than the median, but you will have to complete the second phase of the means test.
- The second stage is to assess if you have enough disposable income to pay off your unsecured obligations, such as credit card payments, by subtracting specific permitted costs from your existing monthly income.
The following is a breakdown of these costs:
Standardized Expenses: These expenditures include those for clothes, food, out-of-pocket medical expenses, utilities, housing, and transportation. The amounts recorded for these charges, nevertheless, are based on internal revenue service-established national norms rather than your actual out-of-pocket costs (IRS).
Payments made to priority and secured creditors: You can exclude your home mortgage and auto loan payments from your monthly costs if you plan to maintain a particular piece of property, such as your house or car. Additionally, costs incurred in connection with debts of priority, such as tax bills, which would not be discharged in a Chapter 7 case, are allowable deductions.
Actual expenditures: If debtors can demonstrate that their actual, reasonable, and necessary expenses for a given category exceed the amount permitted by IRS guidelines, they may be eligible to raise deductions in those areas. In addition, some real costs, such as those related to domestic support responsibilities paid in accordance with a court order, are taken into account in this analysis.
Administration costs: Finally, the means test determines whether you have enough disposable income to pay your creditors by subtracting administrative costs that are a typical component of a Chapter 13 case.
You can apply for Chapter 7 bankruptcy if step two of the means test reveals you do not have enough disposable income to pay at least 25% of your unsecured obligations during a fictitious five-year Chapter 13 plan.
What Takes Place If I Don’t Pass The Means Test?
If your income has recently fallen or your costs have recently grown but you fail the means test, you could still be able to file for Chapter 7 bankruptcy if you can wait a bit before doing so.
Remember that even if you qualify for Chapter 7 relief, you could still be better off filing for Chapter 13 bankruptcy. Chapter 13 may be your best choice if you wish to keep some assets, such as a house or car, by catching up on your loan or mortgage payments. If you are thinking about filing for bankruptcy, you should speak with an expert bankruptcy lawyer who can assess your financial situation, offer your choices, and explain the bankruptcy procedure, including the means test.
If you are thinking about filing for bankruptcy, you should speak with an expert bankruptcy lawyer who can assess your financial situation, offer your choices, and explain the bankruptcy procedure, including the means test.
Without you having to do any thinking, an expert lawyer can guide you through each stage. To schedule a consultation, go to https://recoverylawgroup.com/bankruptcy/