In a previous blog post, we discussed the two options available for consumers (not business entities) to file for bankruptcy: Chapter 7 and Chapter 13. To briefly recap, Chapter 7 is a much quicker process in which you might have to give up some of your possessions in exchange for most of your debts being wiped clean after a few short months. On the other hand, Chapter 13 bankruptcy involves a 3-5 year repayment plan to creditors in which you pay back a portion (or all) of your debts.
Chapter 7 differs from Chapter 13 in that you must qualify for it. To figure out whether or not you are eligible to file for Chapter 7 bankruptcy, you must pass what is referred to as the “means test,” which this blog will explain.
Step 1 of the Means Test
To figure out whether or not you qualify for Chapter 7 bankruptcy, you first need to calculate your yearly income. To do this, find out your total income for the past six months and divide this figure by six. Then, multiply that number by 12 to get your average yearly income. If that final figure is less than the median yearly income for a household of a similar size, then you have passed the means test. For instance, if the median household income for a four-person household in Ohio is $56,11 and you have a yearly income of $55,000, you have passed Step 1 of the means test and do not need to prove anything further.
Step 2 of the Means Test
The majority of people who take the means test pass on the first step. If your average yearly income is more than the median income of a similarly sized household, then you must go to Step 2 and attempt to show that you really should be eligible for a Chapter 7 bankruptcy.
The first order of business for Step 2 of the means test is to calculate your allowable expenses. The expenses considered to be “allowable” depend on a mix of federal, state, and local regulations, but, generally, they are essential expenses like food, rent, and medical costs. After you subtract your allowable expenses from your average income, you now have your disposable income. If that is below a certain limit, then you have passed the means test.
If you do not pass the means test on the first step, qualifying for Chapter 7 will require much more effort from you. Filers often leave out expenses that could be considered allowable; if this happens to you, your disposable income will be higher than it should be, which means that you will miss out on being able to file for Chapter 7.
Chapter 7 bankruptcy, which is a relatively quick process, is not available to everyone who wishes to file for bankruptcy. Without passing the means test, you will have to settle for Chapter 13. Even if you qualify for Chapter 7, though, Chapter 13 bankruptcy might be better for you—especially if you want to keep all of your assets.
The best way to figure out how to proceed in your case is to meet with an understanding and experienced attorney. Our firm has helped countless clients realize a brighter financial future, and we’d love to do the same for you. Get in touch with our team to schedule an appointment with us soon.