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Understanding the Chapter 7 means test

On Behalf of | Jun 6, 2022 | Chapter 7 Bankruptcy

Anyone with severe financial problems might consider filing for bankruptcy. A federal bankruptcy court in Michigan could help someone address debts they cannot pay by approving Chapter 7 liquidation bankruptcy. Would-be filers may need to understand Chapter 7 bankruptcy protection is not guaranteed. Filers must pass the means test first.

The Chapter 7 means test

Chapter 7 bankruptcy involves the liquidation of non-exempt assets to pay specific creditors. A common misconception about Chapter 7 is that the courts will force the liquidation of virtually all assets, but that is not the case. The other myth emphasizes that all assets face a total discharge that absolves the debtor from obligations to all creditors. Some debts are not eligible for a discharge.

Generally, unsecured debt, such as credit card debt, gets discharged. However, the debtor must pass the means test, which examines disposable income and explores whether the debtor’s household income is below the state’s average level. Specifically, the means test focuses on the past six months of income.

The other element examined during the means test is allowable expenses. Anything not deemed an allowable expense would be considered discretionary income. The debtor must provide precise details about income and expenses to the court. Error and ommissions could create problems. Attempts to deliberately deceive the court may result in dire consequences.

Not passing the means test

Failing the Chapter 7 means test does not mean the debtor has no options. Rather, the debtor may file for Chapter 13 bankruptcy. Unlike Chapter 7 bankruptcy, Chapter 13 involves setting up a payment plan for certain debts. Some debts could receive a discharge even when the debtor files for Chapter 7.

Those who initially fail could also wait another six months and retake the means test. The second test could result in an approval, allowing the debtor to gain Chapter 7 protections.