Many people qualify for bankruptcy, but not every request for a discharge is approved and not everyone can utilize the same type of bankruptcy filing. Individuals who are seeking Chapter 7 relief, for example, are subjected to a means test. Only if they pass this test will they be allowed to successfully file for Chapter 7 bankruptcy. If they do not pass, they may need to consider Chapter 13 bankruptcy as an alternative.
Considering how important the means test is, you certainly want to understand it if you’re interested in filing for Chapter 7 bankruptcy. What is this test and what is the government looking for as it questions a potential filer’s eligibility?
Do you qualify financially?
Essentially, there are different financial factors that have to be considered to determine if you qualify for Chapter 7 bankruptcy or not. In an effort to make the bankruptcy process more consistent and to have standards that are less lenient, the Bankruptcy Protection Act of 2005 was passed. This is the Act that set up the means test that is used today.
First of all, the means test looks at the median family income in the state where you’re filing. You’ll need to compare your monthly earnings to that median income. You’ll have to look at your average income for the past six months. Someone who is unemployed may have no income, of course, but many people who are considering bankruptcy are still earning a wage – it’s just not nearly enough to cover all of their costs and debts.
If your income is equal to the state median, then you have the option to use Chapter 7 bankruptcy. This is also true if your average income is under that median, but someone whose income is higher will be barred from filing for Chapter 7. It’s important to consider all sources of earned income, including wages, tips, commissions, bonuses and even overtime pay that you may have earned.
What if you don’t qualify?
If you don’t qualify for Chapter 7 bankruptcy, then you may be able to file for Chapter 13 bankruptcy successfully instead. This is often called wage earners’ bankruptcy, and it involves committing to a reorganization plan. Since you are earning more than the median amount in the state, you should be able to re-organize the debt that you have and re-pay a substantial fraction of it back over 3-5 years. But you cannot use Chapter 7 bankruptcy to eliminate that debt outright. This can be a complicated process, so make sure you know exactly what steps to take when considering either kind of bankruptcy.