For many people struggling with debt, Chapter 7 bankruptcy can be a valuable and viable option for lasting relief. But it’s important to keep in mind that, before you pursue Chapter 7, you must take a test to determine if you’re eligible for this style of “liquidation” bankruptcy.
This test, known as the bankruptcy means test, is one of the earliest and most essential steps in the Chapter 7 process. If you’re considering filing for Chapter 7, it’s crucial to understand what this test is – and, more importantly, how it works.
Breaking Down the Chapter 7 Means Test
In essence, the means test is designed to restrict who can file for Chapter 7 bankruptcy. Largely, it’s intended to prevent high wage earners from using Chapter 7, and move them towards other types of bankruptcy (i.e., Chapter 13, Chapter 11) instead.
By and large, the bankruptcy means test is about taking stock of your personal financial situation, and evaluating whether you meet the criteria to pursue Chapter 7. The test takes into account a number of different factors unique to you, including your income, expenses, debts, and family size.
In evaluating all of these different factors, the means test is, essentially, a method for determining if you have enough disposable income to put toward paying off your debts. To make this determination, the means test uses two major steps:
Step One: Evaluating Your Income
The first (and primary) step in the means test is to determine your household income, and compare it to the median income for your state. If your income falls below the state median for your household size, then you’re eligible to file for Chapter 7, and you can move forward in the process.
Now, keep in mind, there are many moving parts and variables that can affect your reporting at this step of the means test. Broadly speaking, you’ll be looking at your income for the last six months, but it’s also important to factor in sudden or recent changes, as well (such as a recent change in your employment status). Remember, too, that the “median income” standard for your state can change over time, so always verify the accuracy of the forms you’re using, and don’t hesitate to consult with an expert, such as an experienced bankruptcy attorney, if you have any questions or need up-to-the-minute data.
While this may seem intimidating, take heart. According to data from the consumer information site NerdWallet, roughly 88% of debtors who took the means test passed it in this first stage, as of 2013. Similarly, data from US Courts suggests that, of the millions of consumer bankruptcy filings in the US over the period from 2005 to 2017, roughly 68% were Chapter 7, as opposed to just 32% Chapter 13.
Step Two: Evaluating Expenses and Required Payments
If your income does not immediately qualify you for Chapter 7, or if there are lingering questions or other factors to consider, debtors then move onto the second stage in the process: evaluating their expenses, in order to determine how much disposable income they actually have to put towards their debts.
At this point, the means test becomes more complex, more math-heavy, and more individually focused. In broad strokes, though, debtors, at this stage, must take a look at their recent expenses. Within a debtor’s expenses is a category called “allowable expenses,” which is comprised of essential payments like rent, groceries, medical costs, and so on. After accounting for allowable expenses, the amount that a consumer still has left is deemed disposable income, which could be put towards paying off debt.
If the amount of a debtor’s disposable income is equal to our more than a minimum amount set by national and local law, then they will not be able to pursue Chapter 7, and will instead likely consider moving towards restructuring their debts with a long-term payment plan under Chapter 13, or, perhaps, pursuing a practical bankruptcy alternative.
Moving Forward After the Means Test
Now, keep in mind that “passing” the means test is an indication that you qualify for Chapter 7 bankruptcy – but it is not necessarily a definitive indication that you should or must pursue Chapter 7. Even if you pass the means test, there are still additional factors to consider. In some cases, debtors may be best served by seeking counseling and considering alternatives to bankruptcy, or even by pursuing Chapter 13, which often offers debtors the ability to hold onto more assets and address some common financial problems, compared to Chapter 7.
If you fail the means test, your choices are more limited. With that said, however, many debtors ultimately find that Chapter 13 – which allows debtors to restructure their debts and pay them down over a three- to five-year period – is a workable solution, with many upsides. Consumers can also wait and retake the means test again in the future.
Getting the Answers You Need
There’s a lot that goes into the means test. You’ll need to gather a lot of different documentation, and perform some complicated calculations over the course of the process. The means test can be confusing, and certainly time-intensive. And bear in mind that omissions or errors can add up, and may ultimately mean the difference between passing the means test, or having to pursue another course of action altogether.
Fortunately, you don’t have to go through the means test – or any aspect of the Chapter 7 bankruptcy process – all on your own.
If you’re looking for insights on this crucial step in the bankruptcy process, the Gunderson Law Firm can step in and provide the answers you need. There’s a lot that goes into the means test, from understanding current Illinois median incomes, to determining what constitutes an allowable expense, to understanding the distinction between secured and unsecured creditors, to using a variety of mathematical formula, and so much more. Our attorneys and staff can help get you actual, straightforward answers unique to your own situation, and your first consultation with us costs you nothing. No need to search for all the variables and hope you don’t miss any key detail — just reach out, and we will help.
About the Gunderson Law Firm
The attorneys and staff of The Gunderson Law Firm specialize in helping individuals and businesses in the state of Illinois file bankruptcy in the most appropriate ways to discharge debts, and help get a fresh start.
Whether you are beginning to consider bankruptcy as an option for financial relief, researching the means test, pursuing financial counseling or guidance, or looking for an experienced partner to help make the complex bankruptcy process go more smoothly, don’t hesitate to get in touch with the Gunderson Law Firm to get the conversation started.