For people who need to file bankruptcy, determining what type of bankruptcy to file can sometimes be as simple as completing the means test. This test is one that is used to determine if you can file for Chapter 7 bankruptcy.
What is Chapter 7 bankruptcy?
Chapter 7 bankruptcy is a form of personal bankruptcy in which the filer’s assets are liquidated. From there, the funds are distributed to creditors to pay for bills. If the amount the creditor receives doesn’t cover the full amount due, the remaining amount is discharged.
What is the means test?
The means test looks at the filer’s income and expenses. The filer’s income, which is the first factor considered, must be at or less than the median amount for a family of the same size in their state of residence. For example, for filers in Florida, a family of four people would have to make more than $5,344 per month as of May 1, 2014.
If the income is higher than the median income allowance, filers might still qualify for Chapter 7 bankruptcy if their standardized and actual allowed expenses would add up to an amount that would bring the median income to below the acceptable limit if the expense total was deducted from the income amount.
Are there any exceptions?
There are a few exceptions to the means test qualification for Chapter 7 bankruptcy. One of these is if a disabled veteran got into debt while on active duty. The veteran must be at least 30-percent disabled and at least half of the debt must have been incurred during the active duty term.
Another exception is for business owners who need to file Chapter 7 because of business debts. They wouldn’t have to do the means test in order to qualify for Chapter 7.
There may be other special circumstances in which a person who wouldn’t normally qualify for Chapter 7 might actually qualify. Understanding the bankruptcy laws related to the means test can help filers decide if Chapter 7 is right for them.
Source: The United States Department of Justice, “Census Bureau, IRS Data and Administrative Expenses Multipliers,” July 25, 2014