The Bankruptcy Means Test
What Is The Bankruptcy Means Test And Why It Is Important That You Understand It
The bankruptcy means test is a critical component of the bankruptcy process, as anyone who is contemplating filing for a Section 7 Bankruptcy will have to take it.
The purpose of the test is to assess your income, and family size, to work out whether or not you have enough disposable income to repay your debts. The test was initially designed to limit the number of debtors who were eligible for debt forgiveness through a Chapter 7 Bankruptcy but in reality, the vast majority of people who take the means test pass it easily.
For anyone who fails the means test, or who wants to retain possession of certain assets, such as their house or car, then an alternative option could be to restructure their debts under a Chapter 13 Bankruptcy.
Let's Examine How The Test Works And How The Outcome Can Influence Your Bankruptcy Options
Anyone who is struggling with financial issues can sometimes make poor choices based on emotion rather than logic. This might include deciding which type of bankruptcy to file for, and the wrong choice could have serious financial implications, including the risk of losing your home.
The means test was designed to help clarify the process and work out whether or not you are eligible for a Chapter 7 bankruptcy, or if Chapter 13 is your only option.
The means test is comprised of two separate parts, and the idea is to check if you have any disposable income left, which could be used to pay off your debt. For most people, their bankruptcy attorney will take care of the necessary paperwork, filling out the form, and submitting it to the court on your behalf.
It is essential to understand that the test only relates to consumer debts such as a personal loan, credit cards, or medical bills. You do not have to take the test as the vast majority of your debt is as a result of your personal business getting into difficulties. If you are applying for a Chapter 13 Bankruptcy, then the test will form the foundation for setting up your debt repayment schedule.
Part 1 of the Process
The first part of the process is very quick and relatively easy to work out. It basically checks to see whether or not your household income falls below your state's median income.
Preparation and organization is key to every aspect of this process. The more documentation you are able to provide, which demonstrates your income over the previous six months, the better. To find out your state's median income, you can visit the Department of Justice's website.
Obviously, things can change dramatically over the course of six months, but the test will take into account any variation. If for instance, you were employed for the first four months of the period, but then were made redundant, the means test will factor the drop in income into the equation. Likewise, if you were successful in applying for a new job two months ago, then your increase in income would also be factored into the equation.
This test is either pass or fail if your income is below the median income, then you have passed the test, and are eligible to file for Chapter 7 Bankruptcy.
If you are reading this page and are worried about failing, then it might encourage you to know that in 2013 only 12 percent of debtors failed the test, so the vast majority of people will pass this part of the test and can then move forward to the second part of the process.
If you do fail the test, but still want to file for Chapter 7, or if you're going to file for Chapter 13, then you need to take the second part of the test.
Part 2 of The Process
Carefully document your expenses for the previous six months. It is essential that you include all of your expenses, such as rent, groceries, clothing, and medical costs, as these are classified as allowable expenses. Think of these as necessities which you need to function.
Any money that you have left over from your income after allowable expenses have been deducted is classified as disposable income. This is what could be put towards paying off your debt. It is vital to take your time with this process because if you omit any items, or try to claim for the same thing twice, there is a risk that your case could be thrown out. Do not try to hide anything from your attorney, because he or she can only complete your paperwork using the information you provide them with. Problems could arise where you forget to mention a regular expense, which is then not factored into the equation when the Chapter 13 repayment plan is devised. This could result in your repayments being significantly higher, which could then cause further problems down the road.
Not everything will be allowable, national and local standards are decided by the IRS. National standards relate to food and clothing, whereas local standards focus on housing costs and car payments. It is essential that you work closely with your attorney to ensure that all of your expenses are properly documented.
Once all of your documentation is complete, a decision will be made as to the level of your disposable income. Depending on how low it is some people may still qualify for a Chapter 7 Bankruptcy.
Even if you decide against filing for Chapter 7 either because you cannot meet the test, or because you would prefer to keep some of your assets, the affordable-income part of the process is still important. This is because it will be used as the foundation for working out the terms and conditions of your repayment plan.
We Passed The Test - What Happens Now?
If you do pass the means test, this means that you are now eligible to proceed with filing for Chapter 7 Bankruptcy. The benefit of Chapter 7 is that most but not all of your debts will be forgiven. Debts that will be cleared would include any unsecured debts, medical bills, or credit card debt. However, Chapter 7 Bankruptcy does come with some serious negatives such as the possibility of losing your home, so it is not always the best option for everyone.
Just because you have passed the means test, you are not committed to filing for a Chapter 7 Bankruptcy. Chapter 13 might be a better solution, as it gives you the opportunity to catch up on your debts, and perhaps most importantly of all, retain your assets.
We Failed The Test - What Happens Now?
Unfortunately, there is no appeal process should you fail the test, but somewhat ironically, this does not mean that if you have failed the test that Chapter 13 is the only option available to you. This is because there is no time limit on when you have to file for bankruptcy. When you completed the means test, the figures were calculated on the previous six months, so it may be that your circumstances will change again. You can retake the means test six months later, and provided you can survive for that period of time, you might meet the threshold for Chapter 7 by then.
However, if you cannot wait another six months and cannot pass the means test, then you will have no other option than to file for a Chapter 13. This is not necessarily bad news as at the end of three or five years, all of your debt will be repaid, and you can move forward with your life.
Frequently Asked Questions
There usually are court costs associated with filing for bankruptcy, and the costs will vary depending on the type of bankruptcy, and your current financial situation. At the time of writing, the cost of filing for a Chapter 7 Bankruptcy is $306 and for a Chapter 13 Bankruptcy $281. Some courts may also charge an additional administration fee. The good news is that in most cases, it is possible to pay the filing fee in installments. Some courts may also waive the filing fee for a Chapter 7 Bankruptcy if you can demonstrate that your income is below a certain level, and the court decides not to allow you to pay the filing fee in installments. Whether you use a company like Bankruptcy Help or an attorney, there will be additional fees payable, and it is standard practice to pay upfront for those services, particularly in the case of a Chapter 7 Bankruptcy.
It is a common misconception, that once someone is declared bankrupt that all of their debts are discharged, but this is not the case. The first thing to be aware of is that bankruptcy will not cover any debts which were incurred after you filed for bankruptcy, and which were not mentioned during the filing process. There are other debts that are not covered by bankruptcy. These include but are not limited to
• Student Loans
• Any Fines That Are Owed To A Government Unit Such As A City or State
• Any Outstanding Debts For Income or Property Taxes
• Child Support or Alimony Debts
• Any Fines You Have Received As Part of a Criminal Prosecution
Debts that you have obtained fraudulently may not be discharged. For example, if before filing for bankruptcy, and knowing that this was your intention, you decide to go on a spending spree with your credit card, spending money on a vacation, then this may be considered fraud if it can be proven that you had no intention to pay the debt.
In total, there are four different types of bankruptcy available to individuals, and each has specific conditions that must be met.
Chapter 7 - Perhaps the most well known and severe type of bankruptcy. This typically takes between two and three months and involves the sale of your residential property to pay off your debts.
Chapter 11 - A highly complicated process, predominantly targeted towards business debtors, but in some instances, it may be suitable for individuals with substantial debts and assets.
Chapter 12 - A type of bankruptcy very similar to Chapter 13, but exclusively available to family farmers and fishermen.
Chapter 13 - A court-supervised repayment plan which is designed to repay an agreed percentage of your total debt, over a period between 3 and 5 years.
Chapter 7 and Chapter 13 are the most frequently used options; Chapter 13 is preferable in most situations, as it enables the person filing for bankruptcy to retain their property, versus Chapter 7 where they must sell it to clear their debts.
The fact that you have filed for bankruptcy will be registered on your credit report. If you filed for a Chapter 7, then it will remain on the file for ten years, and for seven years if you filed for section 13. However, although obtaining credit will initially be more challenging, it will not prevent you from ever obtaining credit again in the future.
There are probably hundreds if not thousands of reasons why any honest hard-working individual could find themselves in financial difficulty. The bankruptcy laws were designed to provide people with a second chance, and a fresh start. On the other side of the equation, the laws were also intended to ensure that all creditors are treated equally. Once the bankruptcy process is complete, your creditors are prevented from trying to collect any outstanding debts, and as a consequence, you are then able to move forward with your life.
When a debt is said to be discharged, the debtor is no longer legally obligated to repay the debt, and the creditor is prohibited from trying to enforce payment. It is essential to understand that if someone else co-signed on an agreement, they would remain liable for the debt. Finally, if the debt was a secured loan, where you agreed to use property as collateral for the loan, then your creditor may still be entitled to repossess the property, should you not repay the loan. In situations like this, you are advised to speak to our friendly customer service team who will be able to provide you with the correct advice or provide you with the details of a bankruptcy lawyer.