Bankruptcy offers you a chance to get out from under overwhelming debt and rebuild your finances. There are two basic options: chapter 7 and chapter 13. Each one has its own benefits and eligibility requirements, so you may need to research both to figure out which one is right for your situation.
If you choose to file for chapter 7 bankruptcy, one part of the process involves the means test. This test determines whether you meet the qualifications for chapter 7.
Overview of chapter 7
According to the U.S. Courts system, chapter 7 involves the court using some of your assets to pay your creditors. Under this plan, the bankruptcy trustee appointed by the court pays your creditors with funds from collecting and then selling your nonexempt assets.
Before you may have your debts discharged under chapter 7 bankruptcy, you must pass the qualification requirements. These requirements may involve a “means test” designed to make sure you truly need the relief that chapter 7 offers.
Details of the means test
Essentially, if you have income that surpasses a certain threshold, the government assumes that you have the means to pay your debts. Failing the means test usually disqualifies you from filing for chapter 7 bankruptcy unless you provide additional information about special circumstances.
The exact income threshold for chapter 7 partially depends on your location. The bankruptcy court compares your income to the state median. If you bring in more than the state median monthly income, you must go through the means test.
The means test calculations take your income and subtract allowable expenses, such as your mortgage payment and living expenses. The leftover “disposable income” must be less than the established threshold in order for you to qualify for chapter 7.