If you’ve been looking into the prospect of filing for bankruptcy, then you’ve probably seen the phrase “means test” come up a few times. While it’s not necessarily as intimidating as it may initially sound, the means test for bankruptcy is an important concept to understand, particularly if you’re interested in pursuing Chapter 7 bankruptcy.
In essence, the means test is designed to determine who can qualify to have many of their dischargeable debts forgiven through Chapter 7 bankruptcy, by considering factors such as your income and expenses.
For many people, the means test represents one of the first significant hurdles they may come across when looking into bankruptcy as an option for debt relief. But the means test doesn’t have to be scary. In fact, there’s really not much to it.
Let’s dive into some of the FAQs that often come up around this step in the Chapter 7 bankruptcy process:
Does the Means Test Apply for Every Type of Bankruptcy?
The means test is only a qualification for those considering Chapter 7 bankruptcy, also known as a “liquidation” bankruptcy. If you are disqualified for Chapter 7 through the means test, or simply decide that you want to pursue another avenue for debt relief, there are still options available, including Chapter 13 bankruptcy, also frequently called a “reorganization” bankruptcy. There are other types of bankruptcy that may apply in certain situations as well, including Chapter 11; you may also consider working with an attorney to determine if any of the viable alternatives to bankruptcy may work for you.
Another thing to keep in mind? The means test only applies to those with primarily consumer debt. If your debt is mostly from business and tax expenses, this test does not apply to you. It is focused on consumer debt.
How Does the Means Test Work?
We’re going to address this question in broad strokes, because the “nitty gritty” is a lot to go into here. But here’s the big picture.
The means test is generally thought of as two parts. The first part of the means test evaluates whether your household income is below the median household income for your state, drawing on records and data from the last six months. At this point, if the calculations are done and it’s determined that your household income falls below the state median, then you’re essentially cleared to move onto the next steps of filing for Chapter 7.
The second part of the means test looks into your allowable expenses. Using records of your expenses – both actual and standardized – the test is used to calculate your disposable income. If it falls within the right range by both local and federal standards, you can proceed with Chapter 7 bankruptcy.
Do Most People Qualify for Chapter 7 Based on the Means Test?
It’s important to bear in mind that everyone’s circumstances are going to be different. You may not qualify for Chapter 7 bankruptcy in your state due to your state’s median income level or because of your personal expenses. In other cases, human error can result in a mistake that leads to you being disqualified. The means test exists, in theory, to limit the pool of people eligible for Chapter 7.
But with that said, if your income falls below the state median income, you will almost always qualify for Chapter 7 bankruptcy. According to data, most people who attempt the means test do end up qualifying. In fact, per 2013 data from the Executive Office for U.S. Trustees, brought to our attention by consumer information site NerdWallet, all but 12% of debtors who took the means test ended up passing it in the first stage.
What Happens If I Pass the Means Test?
Broadly speaking, if you pass both elements of the means test – evaluating your income and your expenses – you are cleared to pursue Chapter 7 bankruptcy, and can begin proceedings. Ultimately, Chapter 7 may help you to restart your financial life, by allowing you to discharge many of your unsecured debts and restructure others.
Before starting bankruptcy proceedings, you will also be required to take a credit counseling course through an approved agency, as well as a financial management course after you have filed. This is to help ensure that you understand the bankruptcy process you will be going through, and help get you and your finances on a more sound footing moving forward.
In some cases, even if you qualify for Chapter 7 based on means testing, you may still ultimately decide to pursue Chapter 13, or even another, alternative strategy to filing for bankruptcy. This is particularly true for consumers who may want to hold onto more of their assets than Chapter 7 might allow.
What Happens If I Don’t Pass the Means Test?
Failing the means test disqualifies you for Chapter 7 bankruptcy. However, it is not an “end-all-be-all” thing. You can always retake the means test at another point in the future. In the short term, you also likely still have Chapter 13 bankruptcy available to you as an option; this type of bankruptcy may not allow you to automatically discharge your debts, but you may be able to reorganize them and create a multi-year payment plan to make your financial situation much more manageable.
Is There Anyone Who Can Help Me Through This Process?
You may see forms, guides, or calculators online, offering to allow you to perform the means test on your own. In many cases, however, this process can be complex and time-consuming. The means test can be tricky, and you may ultimately be better off consulting with an experienced professional, such as a bankruptcy attorney.
That’s where the Gunderson Law Firm can step in. There’s a lot that goes into the means test, from understanding current Illinois median incomes, to allowable expenses, secured vs. unsecured creditors, and a variety of mathematical formulas.
In short, if you’re a Chicagoland consumer wondering if you qualify, your most effective next step is to get in touch with our team. 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 smoother, don’t hesitate to get in touch with the Gunderson Law Firm.