Understanding the bankruptcy means test

As someone facing considerable debt, whether due to medical bills, credit card use or what have you, you may be working through your options and trying to determine whether bankruptcy may give you the fresh start you crave. Typically, should you decide to move forward with a consumer bankruptcy, you will do so through either a Chapter 7 bankruptcy or a Chapter 13 filing, and the bankruptcy means test can help you determine whether a Chapter 7 filing is potentially an option for you.

The bankruptcy means test is what determines whether you are eligible for pursuing a Chapter 7 bankruptcy, which offers a possible solution for lower-income earners who are unlikely to be able to reasonably pay back their debts. Chapter 13 bankruptcies, meanwhile, provide an option for Americans who have too much “disposable income” available to them to qualify for a Chapter 7 filing. They typically involve creating payback plans to cover at least some percentage of what you owe your creditors.

What the means test entails

So, what, exactly, does the bankruptcy means test entail? There are two main steps in the means test, and if you pass the first, you can go ahead and ignore the second. The first step in the bankruptcy means test involves comparing your own household income against the median household income in Minnesota. If your income is lower than the state’s median income, you qualify for a Chapter 7 bankruptcy.

If, however, you do not pass step one of the means test, but you still prefer to follow a Chapter 7 filing, you can move on to the next step in the test. Stage two involves securing careful documentation and records about your expenses and income to determine how much income you have left over after paying for essentials. The amount of disposable income the test reveals that you have will determine whether you can qualify for a Chapter 7 bankruptcy.

Failing to pass the means test does not mean you should lose all hope. You may have other options available to you that meet your needs, and you can always wait six months to see if circumstances change and then take the test again.

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