The means test is the test that the law applies to determine whether you’re eligible for Chapter 7 bankruptcy—a type of bankruptcy filing that allows debt forgiveness. Chapter 7 bankruptcy usually forgives unsecured debts, such as credit card and medical debt. Filing under Chapter 7 is reserved for low-income citizens or those who have high monthly expenses, while Chapter 13 bankruptcy is for those who don’t pass the means test or who want to retain certain assets, like the family home. Chapter 7 bankruptcy is also designed for personal and consumer debt, not business debt.
The means test takes into account your monthly expenses over the previous six months. It examines your family size, certain expenses and income. A bankruptcy lawyer in Montgomery County, TX can help further explain the means test.
Calculating Your Income
There are two steps to the means test. First, if your income is lower than your state’s median income, that’s it—you qualify for Chapter 7 bankruptcy. While you’ll have to prove this with documentation, around 88 percent of those who file for Chapter 7 bankruptcy are able to pass the means test on this first step.
The test will take into account mitigating factors: whether you were employed for the full six months, whether you expect to be unemployed or going through a dry period soon or whether you’re just about to get a raise. The court will also still look at your monthly expenses—if you have “enough” disposable income according to their schedule, the court may switch your case to a Chapter 13 bankruptcy case.
Calculating Your Expenses
The second step, if your income is higher than your state’s median income, is to pull a list of your monthly expenses. The means test will account for “allowable expenses”—that is, rent, groceries, car payments, clothing and medical costs. The rest of your income after the allowable expenses is considered disposable income, which should go toward paying off your debt. The test uses both national and local standards to calculate the cost of living.
If your monthly income is deemed too low in relation to your expenses, you may still qualify for Chapter 7 bankruptcy. Otherwise, you’ll be expected to put your disposable income toward paying off your debts.
What Happens If You Don’t Qualify
If you don’t qualify for Chapter 7 bankruptcy, you won’t be able to appeal—but there are options. Either you can hold off for around six months, giving your income and expenses time to meet the Chapter 7 means test, or you can file for Chapter 13 bankruptcy. Chapter 13 bankruptcy requires that debtors pay their creditors according to a strict three- to five-year budget, which is monitored by the court. The positive part of filing under Chapter 13 is that debtors can hold onto their assets and restructure their debt, giving them a chance to get caught up.
If you’d like to speak with a bankruptcy lawyer in Montgomery County, TX, contact James R. Jones, Attorney at Law today to arrange a consultation.