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How to Qualify for Chapter 7 Means Test
Bankruptcy is considered one of the most common debt relief options. It can help you pay off your overwhelming debt to your creditor so you can have a fresh start. It is a legal process that allows you to clear your financial problems, reorganize your finances, and pursue debt settlement. Bankruptcy laws may vary from state to state. In Maryland, there are bankruptcy rules that you need to follow when you file for bankruptcy.
Before declaring bankruptcy, you must know how to choose the best bankruptcy type. Choose one that will help you pay all the money you owe to your creditor and solve your debt problems. Chapter 7 bankruptcy is one of the most common types of bankruptcy. A credible Towson bankruptcy attorney can help you figure out if you’re eligible for the chapter that you wish to file. There are certain requirements that you need to meet before you qualify for Chapter 7 bankruptcy. One of the most important qualifications is to pass the means test. This article will explain how Chapter 7 means test works by answering the following questions:
- What is a Means Test?
- How Does Chapter 7 Means Test Work?
- How to Calculate Your Means Test Income?
- How to Fill-Out a Means Test Form?
- What Happens If You Pass the Chapter 7 Means Test?
- What If Your Disposable Income Is Higher Than the Median Income?
What is a Means Test?
The “means test” is designed to keep high-income filers from filing bankruptcy Chapter 7. The main goal of the means test is to require those high-earning debtors to pay back some or all of their debt by filing Chapter 13, rather than granting them a bankruptcy discharge under Chapter 7. It’s called the bankruptcy means test because it is a test that verifies if someone has the “means” to pay their debts.
How Does Chapter 7 Means Test Work?
The means test helps determine the amount of your disposable income by deducting certain monthly expenses from your current monthly income (average income for the past six months before filing for bankruptcy). If your disposable income turns out to be higher than the median income of your state, then you won’t qualify to file for Chapter 7 bankruptcy. In this case, you’ll have to use Chapter 13 if you want to file for bankruptcy.
This test is only for filers who have primarily consumer debts such as credit card debt or medical debt. You’re not required to pass the means test if your debt is mainly from a business that you own. If you’ll file Chapter 13 bankruptcy, this test also plays an important part in setting the payment plan.
How to Calculate Your Means Test Income
The first part of the means test compares your current monthly income to the median income. The median income levels differ by state and size of the household. Each jurisdiction has different allowed amounts for categories of living expenses, such as transportation, housing, and other necessities.
The means test income computation includes your income from the following sources:
- all wages, salary, tips, bonuses, and commissions
- workers’ compensation
- state disability insurance
- unemployment compensation
- rental and real property income
- regular child support or spousal support
- pension and retirement income
- interest, dividends, and royalties
- gross income from a business
- annuity payments
If your disposable income is below the median income of the state, then you pass the means test and you can now file for Chapter 7 bankruptcy.
How to Fill-Out a Means Test Form
If you want to check your eligibility to file a Chapter 7 means test, you can fill out the official means test forms which can be downloaded from the website of the United States Bankruptcy Court. An experienced Towson bankruptcy attorney can help you in filing your bankruptcy paperwork. Here are the required forms:
Form 122A-1 – This is the first form (also known as the form for the Chapter 7 Statement of Your Current Monthly Income). If your income falls below the median income of your state, then you can be eligible for a Chapter 7 bankruptcy.
Form 122A-2 – This form is for the Chapter 7 Means Test Calculation. If your income is higher than the median income of the state, you may still qualify. On this means test form, you’ll subtract the allowable expenses to check whether you have enough disposable income to make monthly payments into a Chapter 13 bankruptcy repayment plan.
Form 122A-1Supp. – Filers like military members are not required to take and pass the means test. To determine whether you’re exempted to take the means test, you need to fill out the Statement of Exemption from Presumption of Abuse Under § 707(b)(2).
What Happens If You Pass the Chapter 7 Means Test?
Passing the means test gives you a go signal to file for bankruptcy Chapter 7. This bankruptcy type will forgive most of your unsecured debts. However, qualifying for Chapter 7 bankruptcy doesn’t automatically mean that it is the best bankruptcy chapter for your case.
When you pass the means test, the court will take a look at the two additional bankruptcy forms from your application – Schedule I: Your Income and Schedule J: Your Expenses. If you still have sufficient disposable income left to repay your debts, the court might modify your Chapter 7 bankruptcy case to Chapter 13.
What If Your Disposable Income Is Higher Than the Median Income?
If it turns out that your disposable income is higher than the state’s median income, you may still be able to qualify for Chapter 7 bankruptcy under certain circumstances. You may undergo a second computation of the means test; however, the calculation becomes more complex than the first.
The second part of the test requires you to gather documentation of expenses for the past six months. Costs of rent, clothing, groceries, and medical bills are called “allowable expenses”. You must use IRS standard expense figures in identifying the allowable expenses. The means test uses the national and local standards in your state for certain living expenses such as rent, utilities, food, gas, and clothing when determining your disposable income. Even if your actual expenses for these items are higher than the allowed standards, you can’t take advantage of them to minimize your disposable income.
You must ensure the accuracy and completeness of the list of your expenses. You can’t make crucial mistakes such as listing conflicting amounts for the same expense or omitting valuable items. Any error can result in the dismissal of your bankruptcy case. If your disposable income adds up to more than a certain amount after the second computation, you fail the means test and cannot get a discharge by filing for Chapter 7 bankruptcy.
The Role of a Bankruptcy Attorney
Taking the means test is one of the most important steps in the bankruptcy process. It is important for you to know and understand how the means test works and how to qualify for it. There are several factors that you need to consider to pass the means test. For legal help in your bankruptcy case, do not hesitate to schedule a consultation with our competent Towson bankruptcy attorneys at The Grafton Firm. Contact our bankruptcy law firm to help you decide which chapter is the best debt relief option for you. From there, we can work together to help you pass the means test and wipe out your debts through a successful bankruptcy filing.