What is the means test and why it’s important? Well, in case of bankruptcy, this test is the determining factor if you can file for debt forgiveness under Chapter 7 bankruptcy.
It also takes into account everything from your income, family size, and expenses. One of its primary purposes is to determine if you have enough disposable income to pay your dues. The test is also given to restrict the number of people who can qualify for the Chapter 7 bankruptcy. Although, one can quickly past this test.
For those people who do not want to qualify for Chapter 7, another option would be paying the debt off in Chapter 13 bankruptcy. Chapter 13 is another alternative for a person who wanted to retain their assets and properties such as a house or a car.
How the test works
The means test determines if you’re qualified to be in Chapter 7 or 13 bankruptcy. The test comprises two parts and geared to know if you have any disposable income that could pay off your debts. Take note that the means test is only applicable if you have a business of your own and medical and consumer debt like a credit card is not applicable.
The first part of the test checks whether or not your household incomes fall into the median income of your state. You need to get documents about your income for the last six months and note if there are any adjustments to it.
If you fall below the median income, you can opt to file for a Chapter 7 bankruptcy. However, if you’re unable to pass the test or you would rather prefer filing for Chapter 13, there’s in fact, a second part of the test.
Gather every documentation that you can of your previous expenses for the last six months. Basic things and necessities such as rent, food, clothing, and other medical expenses are in the “allowable expenses” category. Aside from these, everything is counted as your disposable income that is deemed to pay off your debt. If it shows that your disposable income is low enough, then you can still qualify for Chapter 7 bankruptcy. Take note that you need to be completely thorough with the documentation process.
What happens if you pass the means test?
If you pass the Chapter 7 bankruptcy means test, you will most likely be forgiven most unsecured debts like credit cards and medical expenses.
Depending on your case, Chapter 13 might work better for you because you can still hold on to your assets. Since everyone’s situation is different, it’s best to consult with a bankruptcy attorney.
What happens if you fail the means test?
If you fail the test, it’s better to hold off filing for a while. You can then take the test after six months if you think you can reach the threshold and be eligible for Chapter 7 debt forgiveness.
On the other hand, if you can’t wait that long to file, you will be restricted to Chapter 13 and required to pay off your debts in three to five years time.
Rebuilding your financial life after bankruptcy may sound daunting, but it is possible. However, taking the means test, and seeking the right legal counsel is a few of the first few steps that you should take to rebuilding your credit once again. Talk to the right bankruptcy attorney here.