- What is the bankruptcy Means Test?
In previous post we learned about the two kinds of personal bankruptcy that can be filed, the Chapter 7 and the Chapter 13. In this post chapter, we take a look at the bankruptcy means test, which is the determining factor if you are eligible for filing a Chapter 7 or Chapter 13.
As a brief review, Chapter 7 is the kind of bankruptcy that you file if you don’t have the means to pay your debts or support your daily needs. It is also called the “liquidation” or “fresh start” bankruptcy because your debts can be discharged but you won’t be able to keep nonexempt property.
In order to qualify for a Chapter 7 though, you must first pass the bankruptcy means test. This test was designed in order to prevent people who can afford to pay their debts from getting protection under Chapter 7. Basically, it is the government’s way to make sure that people who have sufficient income to pay their debts cannot wriggle their way out of paying their creditors by filing a Chapter 7.
If you do not qualify for the Chapter 7 bankruptcy means test, you may still opt to file for a Chapter 13, wherein your debts will not be discharged, but instead, a payment plan will be drafted so that you will be able to pay your debts within a certain number of years.
There are two steps in the bankruptcy means test. The first step is called the median income comparison. Here, your income will be compared to the median income of a family the same size as yours in your particular state. The median income may differ dramatically between states.
The second and more complicated step involves calculating disposable income and unsecured debts. Your disposable income is that part of your income that is left after taxes.
To determine whether you will pass the bankruptcy means test, you are required to complete either Official Bankruptcy Form 22A or 22C.
For more information on the means test, the Government’s Official Website www.justice.gov/ust/eo/bapcpa/meanstesting.htm
The result of your bankruptcy means test is crucial in determining whether you should file a Chapter 7 or a Chapter 13.
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