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What is the means test for Chapter 7 bankruptcy?

On Behalf of | Jan 27, 2025 | Chapter 7 And Chapter 13 Bankruptcy |

The means test helps determine if an individual qualifies to file for Chapter 7 bankruptcy. This form of bankruptcy allows eligible debtors to discharge most unsecured debts, such as credit card balances and medical bills. The test ensures that only those with limited financial resources can pursue this option, making it a crucial step in the bankruptcy process.

Understanding the purpose of the means test

The means test aims to prevent abuse of the Chapter 7 process by ensuring that only individuals who truly need debt relief can access it. It examines a person’s income and expenses to determine if they have enough disposable income to repay creditors. If an individual’s income exceeds the threshold set by law, they may need to consider other bankruptcy options, such as Chapter 13.

Calculating income for the means test

The first step in the means test involves comparing an individual’s household income to the median income for their state. The income calculation includes wages, rental income, unemployment benefits, and other sources of earnings over the previous six months. If the household income falls below the state median, the person typically qualifies for Chapter 7 bankruptcy without further analysis.

Analyzing expenses and disposable income

If the household income exceeds the state median, the means test moves to the second step. This step deducts allowable living expenses, such as housing, transportation, and medical costs, from the individual’s monthly income. The calculation determines the amount of disposable income available to pay debts. If the disposable income is minimal, the person may still qualify for Chapter 7.

Seeking legal guidance for the means test

The means test can be complex, and even small errors may affect eligibility for Chapter 7 bankruptcy. Consulting a qualified bankruptcy attorney ensures an accurate assessment and helps individuals explore their debt relief options. Understanding the process is essential for making informed financial decisions.

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