Chapter 7 Means Test
In order to qualify for Chapter 7 bankruptcy, you must pass the means test. Since Chapter 7 allows you discharge all or most of your debts, bankruptcy courts want to ensure that people who actually have the means to repay their debts don’t abuse the system. But how does the Chapter 7 means test work, and what does it mean for your bankruptcy case?
At Carmichael Law Group, we understand how a Chapter 7 means test calculation can make or break your case. Learn the essentials of the means test and how it applies in Georgia and Alabama below.
Why Do You Have to Take the Means Test?
Because Chapter 7 offers significant benefits and can discharge large amounts of debt, the federal bankruptcy courts use the means test to ensure that only people who really need it — typically low-income individuals — can use Chapter 7. The rationale is that if you lack significant financial resources, you will probably never be able to repay your dischargeable debts, and are therefore eligible for a streamlined Chapter 7 bankruptcy.
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How Does the Chapter 7 Means Test Work?
Every year, Alabama and Georgia report median (or average) income levels, based upon the size of household. For example, Alabama’s median income for a family of four was $6,538.00 as of May 1, 2019.
If you have made less than the state median income for the past six months (which changes from year to year), you may automatically qualify for Chapter 7 and do not have to worry about passing the means test.
If your income is higher than the median, you will need to complete the next step, and perform a series of calculations. Because these calculations are relatively complex, most people consult with a bankruptcy lawyer to determine their eligibility for Chapter 7.
The next step in the means test measures how much disposable income you have after all of your debts are considered. To do this, you subtract your monthly expenses from your current monthly income. Your current monthly income is calculated using the average of your last six months as a baseline. Your debts may include your mortgage, car payments, utility bills, child support payments, unpaid taxes, medical bills, childcare costs, court-ordered payments, and other debts. This means that even if you have a significant income, if your debt outweighs it, you may still qualify for Chapter 7 under the means test.
If the amount leftover after expenses have been deducted — also called disposable income — is not enough to allow you to repay your unsecured debts, you will pass the test.
