Do you want to completely wipe out your debt? When many people think of bankruptcy, they believe it as a way of completely erasing their debt. However, for the most part, bankruptcy provides two pathways. There is the liquidation of debt under Chapter 7, but there is also a court-supervised debt repayment plan with Chapter 13. At one time, a person could simply choose which path they wanted to take. Since 2005, bankruptcy law demands that many who can repay their debt file a Chapter 13, instead of a Chapter 7. This change spawned the creation of the means test.
The purpose of the bankruptcy means test is as an objective measure of the individual qualifying for a Chapter 7 bankruptcy. Nevertheless, some people can bypass this evaluation. So, if you are a disabled veteran who acquired your debt while on active duty or in homeland security activities, you can file a Chapter 7 bankruptcy regardless of your income or expenses. Additionally, if your debt is from owning a business, the bankruptcy means test is not relevant to your situation.
The means test will first evaluate your six-month average income. Comparing your average to the state median income is the first hurdle to pass. Regardless, even if your income is below the median, the court may still conclude you have adequate income to repay creditors. If your income is above the state median, the means test will analyze your income compared to allowed expenses. If the court finds that you have enough income pay some unsecured debt, then you only qualify for a Chapter 13 with a debt repayment plan.
However, even if you fail the means test, you do have right to file a Chapter 7. But, if you make this choice, be prepared for a creditor motion to convert to a Chapter 13 bankruptcy or to dismiss the case altogether. The only real way to defend your Chapter 7 filing is if you have special circumstances, such as a serious medical condition or recent unemployment.
You will need documentation to prove your situation, but, if the court finds in your favor, you will be permitted to file under Chapter 7.
Do you have any questions? If you would like to talk about the bankruptcy means test, or a related topic, please contact us.