What is a means test?
Bankruptcy uses something called a “means test” to determine under which chapter of bankruptcy you can file. The amount to qualify will vary by state and uses your income, expenses, and household size to determine if you are able to file under a Chapter 7. Many people favor a Chapter 7 bankruptcy, as it will forgive most of your unsecured debts, but this may not be the best option for you. It is important that you speak with a bankruptcy attorney to discuss your current financial situation and review what options will work best for you.
What is its purpose?
The means test is designed to ensure that you are able to go through the bankruptcy process. It also ensures that higher-income earners do not use a Chapter 7 as they have the means to pay more of their debts back.
How does it work?
To determine whether you can file and under which chapter you will qualify, your attorney will need at least six months of your income from all sources. You will also need detailed information about your expenses over the past six months. If your disposable income is considered greater than your state’s median income, you will likely be expected to use your disposable income to repay your creditors. This does not mean that you are unable to file for bankruptcy.
What if I don’t pass?
Not to worry If a person doesn’t pass the means test because there are many options, including appealing the process or filing under a Chapter 13 instead. Under a Chapter 13 plan, you will probably repay a portion of your debt through court-approved and monitored monthly payments. Again, it is important to speak with an experienced bankruptcy attorney to see under which chapter of bankruptcy you should file. After speaking with an attorney, you may find that you are able to pass the means test after all.
Are you in Southern California and considering filing for bankruptcy? Contact our office to set up a consultation today.