Means Test

A means test only applies to you if you file a Chapter 7 bankruptcy. When you file a Chapter 7 bankruptcy you will need to pass a means test. A means test helps the court determine if you satisfy the requirements to receive a debt relief through a Chapter 7. Up until 2005 debtors were able to proceed with a Chapter 7 without having to pass a means test. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 established certain protections for consumer creditors. Debtors can no longer discharge debts through a Chapter 7 if they have enough money at the end of the month. A means test will take into account a variety of financial factors before allowing a debtor to proceed with a discharge.

If you have failed a means test, it is either because you have not provided adequate information that explains your financial situation or because you have too much money left at the end of the month.  Since Chapter 7 discharges most consumer credit, a discharge is more difficult to achieve than it was prior to 2005.

Whenever you file a bankruptcy you will want to discuss your intentions with a bankruptcy attorney. A bankruptcy attorney can analyze your situation and help you find alternatives to a bankruptcy. If you have been doing your research you should know by now that a bankruptcy is not for everyone. In some cases, if you have the ability to pay back a debt it is best to contact your creditors.  Debtors may work with your creditors to establish a debt repayment program which can help them avoid a bankruptcy.

Furthermore, an attorney can help you choose the correct type of bankruptcy chapter that fits your situation. If you wish to file a Chapter 7 bankruptcy, a bankruptcy attorney can help you gather the correct documents to satisfy a means test. If you cannot pass a means test you may want to consider a Chapter 13. Chapter 13 allows debtor with higher earning potentials the ability to file a bankruptcy and receive bankruptcy protection.  

To pass a means test you will need to show that your income is lower than the local average median. Unfortunately, if you have enough disposable income at the end of a paycheck, you will be required to file a Chapter 13 bankruptcy or not file a bankruptcy at all. A bankruptcy should be seen as a last option to settle a debt. In many cases, a bankruptcy will usually benefit individuals that cannot pay off a debt within 7 to 10 years. Debtors who are so much in debt that they are living paycheck to paycheck should consult with an attorney to achieve some form of debt relief. To discuss your financial situation with the Bankruptcy Attorney, you may contact our office at 424-285-5525. A bankruptcy attorney will help you file all the appropriate documents for your bankruptcy and will guide you through every step of the way.

A Chapter 7 Bankruptcy

When you file a Chapter 7 bankruptcy there are a couple of things you will need to understand. If you are working with an attorney then you may already know of the different factors that come into play when you file a Chapter 7 bankruptcy. Debtors that proceed with a Chapter 7 bankruptcy will be required to file statements about every aspect of their financial life. They will have to include documents that explain their economic situation, their financial obligations, information pertaining to their debtors and types of debts, and will need to pass a means test. A Chapter 7 is only appropriate for low earning individuals who have no way of ever repaying their consumer debts. A Chapter 7 is not for debtors who have the capacity to pay back credit loans, private loans, and medical bills.  

Upon completing the means test, you will be required to attend a creditors meeting where a bankruptcy trustee will confirm your identity and place you under oath. You will be required to answer questions about your financial affairs and other questions that a creditor may have. The creditors meeting usually last between five to fifteen minutes, but you will want to make sure that you bring the right type of documents to the meeting in case you need to present certain information.

If all goes as planned you will work with a bankruptcy trustee who will repossess all of your non-exempt property. Exempt property is a property that is under a certain value and can be kept from repossession. In Chapter 7, the non-exempt property is sold off and the earnings are distributed amongst your debtors by the bankruptcy trustee. After you have sold off your property to pay off your creditors, your consumer debt is discharged and can never be claimed by a creditor or debt collector.

Factors that affect a means test aside from your income

To discharge debt through a Chapter 7, you will need to pass a means test. There are a variety of factors that can affect the outcome of a means test. The following may not be the only factors that affect your case, you may want to speak with an attorney about the specifics of your situation to have a better understanding of your ability to pass a means test. A means test will take into account your income and your financial obligations before providing a pass or a fail. Some factors include:

  • A reduction of income: If you have been demoted or you have lost your job, the court will take into account your new wage or earning potential.  
  • Medical conditions: The court will also take into account any medical conditions that affect your ability to work. Individuals with medical conditions may be required to pay for their medical expenses which means they are unable to keep up with consumer debts.
  • A divorce: Many times a married couple will not qualify for a means test if their combined earning potential is above the median income of their state. A divorced individual with a low income should be able to pass a means test.
  • You are a student that pays for school: a means may also take into account student loans and school expenses.
  • You are taking care of an elderly person: if you taking care of a dependent adult or a child, the court will take into account the impact that the dependency has on your economic situation. The more dependents that a debtor has the higher their income can be to pass a means test.
  • You are paying alimony and child support: Alimony and child support payments are not cheap. In many cases, you will be paying a percent of your earning potentials which means the more you earn the more you pay. On the other hand, if you are receiving alimony and child support, it will count as income which may affect your ability to pass a means test.
  • You are serving in the military: certain members of the military may not be required to pass a means test when filing a Chapter 7 bankruptcy.

What happens if I do not pass a means test?

If you fail your means test it means that you were not able to prove that you qualify for this type of debt relief or because you earn enough to pay your debts. If you do not pass a means test you may want to speak to your attorney about a Chapter 13 bankruptcy. A Chapter 13 bankruptcy allows an earning individual to pay back their debt through a three to five-year repayment program. The repayment program is a document that you and your attorney can draft and submit with your bankruptcy petition. A repayment program highlights the amount that you are capable of paying. In addition, a debtor may request that certain fees be discharged. A repayment program allows debtors who did not qualify for a liquidation to establish a repayment program that will help them get back on their feet. You do not have to live paycheck to paycheck and there are ways that a bankruptcy can alleviate economic stress for earning individuals.

If you choose that a bankruptcy is not for you, you may still work with an attorney who can negotiate with your creditors. Establishing a debt settlement program is the best option for individuals who have the capacity to pay back their debt. Not only will they be able to pay back their debt in terms and conditions that work for them, they will also be able to discharge certain fees. In many cases, an attorney can help mediate the process so that both parties come to an agreement.

What happens if I pass a means test?

If you pass your means test it means that you were successful in proving your case to the court. Individuals with an income that is under the median income of their state or individuals with a variety of financial obligations are usually able to pass a means. When you pass a means test, the court will proceed with your Chapter 7 bankruptcy. When you file a Chapter 7 bankruptcy you will be appointed a bankruptcy trustee who will guide you through the liquidation process.

Preparing for a Means Test

The first part of the means test is used to establish the debtor's monthly income for the last six months before he or she filed a bankruptcy. To determine your income the means test will take into account the following factors:

Your total monthly wage including tips, commission, bonuses, and overtime including:

  • Royalties
  • Workers Compensation: if you are receiving workers compensations, the earnings will affect your overall income. However, in most cases workers compensation provides a third of your payment which means that if you are living solely off of workers compensation then you are most likely to pass a means test.
  • Property income: if you rent property, meaning that you own property and rent to someone else, the earnings will count towards your income.
  • Child support and/or alimony: if you are receiving financial support through a child or spousal support it will affect how you present your income. In most courts, if you receive child support or alimony, it will count towards your income. If you are receiving alimony and you are a working individual and you find that you are above the median income of your state you may not pass a means test.

Debtors that make over their state median income will need to provide additional claims to pass a means test. If you are a high earning individual and you have enough disposable income at the end of the month, you may not be able to pass a means test. However, if you are earning above the state median household, then you will need to provide proof of any dependents and how the money is being spent. On the other hand, debtors that are facing unemployment or who are facing a medical condition that affects their earnings potential, will need to provide proof of their claims.

As mentioned earlier, a means test only applies to you if you are filing a Chapter 7 bankruptcy. Not everyone qualifies for a Chapter 7 so you are advised to speak with an attorney to help you determine if you qualify for this type of debt relief. Individuals who do not qualify for a Chapter 7 will always have the option to consider a debt settlement program or a Chapter 13 bankruptcy. A Chapter 13 allows debtors to establish a debt repayment program while receiving bankruptcy protections.  If you are in the state of California, you are encouraged to speak with a local bankruptcy attorney.

An attorney can ensure that you qualify for a certain chapter before you file your petition. To receive an honest analysis of your financial situation and to see if there is any other option to alleviate your economic stress before a bankruptcy, you are encouraged to contact a bankruptcy attorney today. If you wish to consult with the Bankruptcy Attorney, you may reach our offices at 424-285-5525.