One of the biggest concerns for individuals wishing to file bankruptcy is knowing whether they are eligible for Chapter 7 or Chapter 13. Before 2005, qualifying for Chapter 7 bankruptcy was relatively easy. However, after the Bankruptcy Protection Act of 2005 was passed by Congress, individuals whose median income is equal to or greater than their state’s median income may need additional calculations offered through the means test to be considered eligible for a Chapter 7 bankruptcy.
The means test is divided into two parts. The first part compares an individual’s average income for the six months leading up to their filing to that of the median income for a family their size in their state. Incomes that fall below this level are eligible for a Chapter 7 bankruptcy. Incomes that are equal to or above it may require them to file a Chapter 13 debt repayment plan.
The second half of the means test is used to identify the debtor’s disposable income. It calculates what income is left over after an individual pays their allowable expenses using a combination of actual and standardized deductions. It is necessary for an individual completing the means test to use the standardized deductions offered by their state’s IRS allowances.
If through the means test, debtors are shown to have disposable income which can be used to pay their debts, a bankruptcy trustee may convert the debtor’s petition to a Chapter 13 bankruptcy. However, they may be able to file for a Chapter 7 bankruptcy and defend their decision by explaining special circumstances they believe makes them eligible for a Chapter 7.
The means test can be complex and confusing for individuals uncertain about how to calculate their deductions. Since the means test may be used to determine an individual’s eligibility for bankruptcy, it may be in their best interests to complete it with the help of an experienced bankruptcyattorney.