Thinking about filing Chapter 7? It can be an effective way to get relief from overwhelming debt. But first, you have to pass the means test. The means test is, at least in theory, an objective standard for determining whether you have enough disposable income to pay some or all of your debt. The test was established in 2005 after allegations from lenders and credit card companies that the Chapter 7 process was being abused by people who could actually afford to pay their debts.
Step 1: Median #
The first step of the means test is simple. You compare your household income with the median income in the state where you live. If you’re below the median income, in most cases you pass, and you’re eligible to file Chapter 7.
Let’s take the example of a household of four, and let’s say the median annual income for a household of four in your state is $119,662. If your household’s income is below that, you would meet the means test.
Step 2: Disposable Income #
If your income is above the median, you might still qualify under a second step of the means test. The nutshell version is this: you take your monthly gross income, subtract certain allowed expenses and see what is left over. This is called your “disposable income.” If your disposable income is too high, the presumption is that you can afford to pay something towards your debts, and you won’t be able to file Chapter 7. However, if your disposable income is less than about $250 per month, you may still qualify to file Chapter 7.
Proceed With Caution #
If you are considering filing for Chapter 7 bankruptcy, please keep in mind that while meeting the means test can be quite simple for many debtors, the full means test can be very technical.
Effect of Prior Bankruptcy #
If you have previously filed a successful bankruptcy you’re restricted from filing Chapter 7 again for several years.
Prior Chapter 7 #
If you previously filed Chapter 7 and received a discharge, the waiting period to file another Chapter 7 is 8 years.
Prior Chapter 13 #
If you successfully filed Chapter 13, there are three possible options:
- If 100% of claims were paid in the prior Chapter 13 bankruptcy there is no mandatory waiting period.
- If 70% of claims were paid in the prior Chapter 13 bankruptcy, the Chapter 13 Plan was proposed in good faith and was the debtor’s best effort, then there is no mandatory waiting period.
- If neither of the above apply, the mandatory waiting period is 6 years.
There are many variables that could affect whether you can and should file for bankruptcy. It is strongly recommended that you consult with a qualified attorney to determine whether bankruptcy is right for you.
