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.
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.
If You Pass the Means Test
Passing the Chapter 7 means test, however, does not automatically qualify you for Chapter 7. You will have to send a series of forms and documentation to the bankruptcy court. The court will look at the forms related to your income and your expenses and render a decision based on its findings. If your remaining income is enough to pay something to your creditors, the court may decide to convert your case to Chapter 13.
It’s also important to remember that just because you pass the means test doesn’t mean that Chapter 7 is the best option for you. Your bankruptcy attorney can help you determine whether other alternatives are better suited to handling your debt problems. For example, if you want to try to save your home from foreclosure, Chapter 13 may be a better option.
If You Fail the Means Test
Essentially, the court will rule on whether or not you pass or fail the means test. This means that even if your attorney provides the court documentation to prove that you have passed, that doesn’t mean that the court will accept it. To give yourself the best chance of passing the means test, you should complete your forms carefully and detail all the necessary information.
While you can’t appeal a denied petition, you can take the test again in six months if you feel that your situation will change enough that you can meet the threshold for debt forgiveness in the future.
Otherwise, the only other option for filing individual bankruptcy is Chapter 13. Chapter 13 offers many advantages. One is that it allows you to make monthly payments over a span of three to five years to repay your creditors. A bankruptcy attorney can help you determine whether Chapter 13 is right for you.
Learn More About the Chapter 7 Means Test
Because the means test considers a wide variety of factors, it’s in your best interest to consult with an experienced bankruptcy attorney before filing. At Carmichael Law Group, we can help you understand how the test applies to your situation, and what you can do to reclaim control of your finances. We will also act as your advocates against aggressive creditor tactics. To learn more about your eligibility for bankruptcy, contact us today.