Individuals facing financial trouble will likely happen upon the phrase “means test” while researching their debt relief options. For many, the Chapter 7 means test is often the first hurdle they will face on the path to filing bankruptcy.
The means test was developed as a financial measure to examine whether or not an individual had income sufficient to pay their debt. Numerous factors go into the calculation that is ultimately used to determine Chapter 7 eligibility. For many individuals, Chapter 7 bankruptcy is preferrable because it has a shorter duration and focuses on the elimination of unsecured debts. If the means test determines that the individual’s monthly income is sufficient to pay a portion of the debt, he or she might not be eligible for Chapter 7 but can still qualify for Chapter 13.
Chapter 13 bankruptcy is often referred to as debt reorganization and repayment. Individuals can protect numerous physical assets from foreclosure, repossession or liquidation while repaying a portion of their debt during a scheduled repayment period. This period can last either three or five years depending on their financial situation.
The Chapter 7 means test generally follows two steps when determining eligibility:
- Step one: The income is compared to the median household income of a family of the same size in their state.
- Step two: The individual or family expenses are thoroughly examined to fully understand the ability to repay debt. The Bankruptcy Code specifies numerous factors and types of debts that are used in the calculation.
If you are facing mounting debt or have weathered an emergency such as job loss, divorce or a medical event, it is wise to discuss your unique financial situation with a skilled bankruptcy attorney. Based on several factors, you might be eligible for Chapter 7 or Chapter 13 bankruptcy.