If you determine that bankruptcy is the best solution to your debt problem, you must then decide whether you want to file for Chapter 7 or Chapter 13 bankruptcy. In a Chapter 7 bankruptcy, you can discharge all of your unsecured debts, such as credit card debt, personal loans and medical expenses.
For many people, Chapter 7 is the ideal solution, as it provides a fresh start usually about 100 days after the Chapter 7 is filed. However, some people do not qualify for this type of debt relief because their income is too high, or because they want to discharge their debt without losing all their assets or because they need to reorganize their debt. The latter type of people may wish to file a Chapter 13, which is basically a plan to restructure debt. Whether you hope to qualify for Chapter 7 bankruptcy or to prove eligibility for Chapter 13, you will have to go through the means test. NerdWallet explains what the bankruptcy means test is and how it works.
The bankruptcy means test
The bankruptcy means test is a test designed to ascertain if you have enough disposable income to repay debts. The test takes into account your household income, family size and expenses. Congress designed the test to limit the number of people who qualify for Chapter 7 bankruptcy, though, according to NerdWallet, most people easily pass the test.
How the means test works: Part 1
There are two parts to the means test. The first part is straightforward in that it involves determining whether your household income is less than the state’s median income level. If it does, and if you can prove it does via six months’ worth of documentation, you automatically qualify for Chapter 7.
Though the bankruptcy courts base the means test on the past six months, it does allow adjustments for recent changes. For example, if you recently lost your job, the courts would account for the drop in income. Likewise, if you recently obtained a new job with better pay, it would consider the pay increase when determining your eligibility.
According to data from the Executive Office for U.S. Trustees, as many as 12% of bankruptcy filers pass the means test in the first step. If you are not among the 12%, or if you hope to qualify for Chapter 13, you will move on to the second part of the means test.
Part 2 of the means test
The purpose of step two of the means test is to determine whether you have enough disposable income after your allowable expenses to put toward repaying your debt over the next three to five years. “Allowable expenses” include groceries, rent or mortgage, medical expenses, car costs and necessary clothing.
It is important that you are thorough during this part of the test, as omitting items, listing the same expense twice or making other mistakes could result in the courts denying the relief you want. Moreover, this portion of the means test will determine whether you qualify for the type of bankruptcy for which you hope to file. An attorney can help you fill out your expense report if it comes to it and ensure you can move forward with your life in a way that works best for you.