The chapter 7 bankruptcy means test is meant to evaluate whether an individual is eligible to file bankruptcy using the chapter 7 bankruptcy act. Chapter 7 bankruptcy is primarily designed for consumers with unsecured debts like credit card debts or medical bills. It also covers personal loans, dishonored checks, and utility bills that are past their due date. According to Arizona Bankruptcy and Debt Solutions, it is the most filed type of bankruptcy because it offers a variety of benefits. For instance, it facilitates the erasure of most consumer debts and halts attempts by creditors to get their money back. It also prevents garnishment of the debtor’s salary or wages.
During the means test, your monthly expenses are considered to determine if you’re eligible to claim the chapter 7 bankruptcy. This means you can still qualify even though you earn a good salary or wages. In essence, all expenses that are considered allowable such as basic expenses like food and medicine are deducted from the principal income before determining the disposable income. The court will then determine your debt obligation from the disposable income. The site Income Holic will guide you through what to learn next.
What Happens During the Means Test
Before taking the means test for bankruptcy, the debtor must fill out the Official Bankruptcy Forms provided by the court. This form takes into account the petition, financial statements, and schedules. While filling the form, the debtor must provide the following information besides their income information.
- The names of all creditors, the amount they owe them, and the nature of their claims
- Any property entitled to the debtor
- enough information on the debtors’ monthly living expenses such as food, shelter, clothing, and transportation.
The first step during the means test is to assess whether or not your earnings are below or beyond your state’s average earning score. This score is the average income set by the state for similar households within your region. For example, if you’re a family of five, then your score will be determined by the average income set by your state for a family of five.
The court evaluates your average monthly income by documenting enough information on income sources and amounts in the past six months. That means any increase or decrease in earnings within this period is put into consideration. If your recent six-month earnings are below the state’s average and there are no means for increasing the income, you’ve passed the test and can proceed with filing for bankruptcy. The main assumption is that debtors below the state’s average income threshold are incapable of repaying their creditors; therefore, filing for chapter 7 bankruptcy is entirely legal for such debtors.
What if your Average Income is Above your State’s Mean Score
The mean test will not disqualify you automatically if your average income surpasses that set by your state. Instead, the means test allows you to proceed by filling your monthly expenses as specified.
Mean Test Based on Personal Expenses
The second step of the means test takes into account your living expenses over the past six months. The aim is to deduct allowable expenses like food, clothing, and rent. The amount left after primary expenses are excluded is considered disposable income and can be subjected to paying pending debts. However, that depends on whether the amount can make a meaningful debt payment. If the disposable amount is below the reasonable amount, you are still below proper means to repay the loan, therefore qualifies to file the chapter 7 bankruptcy.
During this step, ensure that your expenses are well documented. Hiring a competent lawyer should help with this process. In addition, the documentation process should observe local and national standards of allowable and disposable expenses. The International Revenue Service issues these standards.
In addition, meticulous care should be observed during filling to avoid omitting items or giving varying amounts on similar expenses. That way, the chances of your case being disqualified by the court decreases.
Although the means test is meant to exclude top earners from filing for Chapter 7 bankruptcy, not all high-income individuals can repay their debts, and they should look for other legal options. On that note, filing chapter 7 bankruptcy is great protection from all procedures involving creditors hence allowing you to safeguard your valuable possessions.
