For many families in extreme debt, filing for bankruptcy may seem like the only option. For personal estates, Chapter 7 bankruptcy is the most common type to apply for. However, before you start filling out paperwork, it is beneficial to know whether you even qualify.
While you may initially assume you should simply file for Chapter 7 bankruptcy whenever debt exceeds the means to pay it back, you will need to pass a means test first.
The first part of the means test
A means test takes into account how much disposable income you have. Attorneys can review what your household income was for the previous six months. Then they compare that amount to what the average household income is for a similar household in the state.
As an example, take a family of four, consisting of two parents and two children, who makes $28,000 a month in total in Florida. The means test involves comparing this family to other four-person families in the state of Florida. Comparisons never include average household incomes in other states. If the family’s income was below whatever the median would be, then the family would automatically qualify to file for Chapter 7 bankruptcy. In the event the income was still higher than the median, then the family may take another course of action.
The second part of the means test
Many people who want to file for Chapter 7 bankruptcy assume if they do not pass the initial part of the means test, then they cannot apply. That is not always the case. There is another component of the means test that takes into account expenses in addition to income.
This part of the test subtracts overall expenses from income. After the deductions, if you are left with little to no disposable income, then Chapter 7 bankruptcy would once again become a viable option. However, if your expenses would still leave you with a substantial amount of income, then bankruptcy is not possible at this time.
One final point
It is important to remember that simply because you qualify for Chapter 7 bankruptcy does not automatically make it the ideal course of action to take. It would still be a good idea to request that a bankruptcy attorney review the specific situation in detail. The means test is merely a way to see if you qualify on a basic level.