The Means Test: Is Your Income Low Enough for Chapter 7 Bankruptcy?
An online calculator tells you if you can file for Chapter 7 bankruptcy.
When the new bankruptcy law passed in 2005, it included a new "means test" -- a formula designed to keep filers with higher incomes from filing for Chapter 7 bankruptcy. (These filers may use Chapter 13 bankruptcy to repay a portion of their debts, but may not use Chapter 7 to wipe out their debts altogether.)
Because of this new requirement, some people mistakenly believe that they must be completely penniless in order to use Chapter 7. Not true. You can earn significant monthly income and still qualify for Chapter 7 bankruptcy, even under the new law. In fact, most people who would have qualified for bankruptcy under the old law still qualify under the new law. This article shows you simple ways to determine whether you could pass the means test -- and, therefore, use Chapter 7 -- if you were to file for bankruptcy.
How Does the Means Test Work?
The means test was designed to limit the use of Chapter 7 bankruptcy to those who truly can't pay their debts. It does this by deducting specific monthly expenses from your "current monthly income" (your average income over the six calendar months before you file for bankruptcy) to arrive at your monthly "disposable income." The higher your disposable income, the more likely you won't be allowed to use Chapter 7.
To take the means test, you must first determine whether your income is more or less than the median income in your state. If you earn more than the median, you must figure out whether you would have enough left over, after subtracting certain expenses, to repay some of your debt.
Is Your Income More Than the Median?
The first step is simple: If your current monthly income is less than the median income for a household of your size in for your state, you pass. Period. You're done. You do not need to complete the rest of the means test. You can file for Chapter 7.
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