Chapter 7 bankruptcy or liquidation bankruptcy encompasses all your non-exempt property sold and used to pay off your debts. Individuals with little to no income that cannot pay all or any portion of their debts, usually choose this type of bankruptcy. If the debtor has enough income to repay a part of their debt, they must file under Chapter 13 bankruptcy. The decision of which type of personal bankruptcy to file, Chapter 7 or Chapter 13, is determined through the Bankruptcy Means Test.

What is the Bankruptcy Means test?

The bankruptcy “means test” allows the courts to determine whether your income is low enough to file for Chapter 7 bankruptcy. The test is for those who have consumer debts. You do not need to pass the means test if you are filing a Chapter 7 bankruptcy for your own business. 

This test considers your income, essential living expenses, and family size to determine whether you have enough disposable income to repay your debts. This test calculates the debtor’s income, expenses, and debts to see if any repayment is possible. 

The bankruptcy means test determines who may file Chapter 7 bankruptcy for debt forgiveness. The means test formula is designed to keep high wage earners from filing Chapter 7 bankruptcy and having all of their debts forgiven when some repayment could have been made to creditors. 

How does the means test work?

The means test is a three-part test, which evaluates your income, expenses, and debt balances.

  1. Income. First, you must pass the income portion of the “Means Test” to verify if your annual income is below your state’s median. The total computation of your income is based on the last six months of your salary, incentives, overtime, unemployment compensation, pension, worker’s compensation, and retirement income. If you own a business or area sole proprietor, your income will include business and professional income. Other sources of income included are real property, dividends, royalties, and state disability insurance.

Nevadans that have filed bankruptcy after May 1, 2020 and are a family of one with wages below $52,449.00 will automatically qualify for a Chapter 7 bankruptcy. If you are a family of two that makes below $65,756.00 then you will automatically qualify for a Chapter 7. If you are a family of three and make below $74,856.00 then you will automatically qualify for a Chapter 7. If you are a family of four and make below $81,528.00 then you will automatically qualify for a Chapter 7. If your income is above this, then to qualify for a Chapter 7 bankruptcy, you will need to pass the next part of the test.

  1. Expenses. Next, you must pass the expenses portion of the “Means Test” to verify that your essential living expenses are genuinely necessary expenses used for daily living. You will need to gather information about your expenses for the past six months. This information may include your monthly rental or mortgage, groceries, clothing, and medical costs that makeup what is called “allowable expenses.” What is left after allowable expenses is deemed disposable income that could be put toward paying off the debt.

All allowable expenses will be based on both national and local standards utilized by the IRS, which cover items like food and clothing, housing and car payments. 

Your income minus your expenses is your disposable income. If you have a high disposable income available, you are expected to use your disposable income to repay creditors. 

  1. Debt. Lastly, your debt payments are totaled and evaluated. You will need to provide evidence of all secured loans such as mortgages and car loans. You will need to do the same for unsecured debt like credit cards, medical bills, personal loans, or lines of credit, etc. You will also need to provide statements for any priority claims such as IRS taxes owed, past-due child support or alimony, student loans, etc.

Your disposable income net of debt payments will result in a net disposable income or loss.

The process if you qualify for a Chapter 7 Bankruptcy

The court will assign a trustee to oversee handling your bankruptcy case. Generally, your bankruptcy attorney will help you complete the Official Form 122A-2, which is the Chapter 7 Means Test Calculation. After submission to the court, the trustee will rule. If you qualify for Chapter 7, the court will decide what nonexempt assets will be sold. Once all assets have been liquidated, and creditors paid, your debts will be discharged.

States usually have a list of personal property exemptions, such as a basic vehicle, some equity in your home, even cash you possess in bank accounts and retirement savings. The goal is not to have you live on the streets, but still allot for the debt you have incurred.  Most people who file for a Chapter 7 bankruptcy get to keep all of their assets as their assets are exempt.

What happens if you fail the Means Test?

High-income filers who fail the means test have the option to utilize Chapter 13 bankruptcy to repay a portion of their debts but will not be able to use Chapter 7 bankruptcy to take care of their debts altogether.

If you do not qualify according to the means test, there is no appeal process, but you may be eligible for a Chapter 13 bankruptcy filing, which will reorganize your debts under a three-to-five-year repayment plan. 

If you plan to file Chapter 13 bankruptcy, the portion of the allowable expenses of the means test will be used when working out the terms of your repayment plan.

Debt Rescue Law can explore all options and assist you in filing for bankruptcy if need be. Call for a free consultation at (833) 707-1234 today.

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