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How the Chapter 7 bankruptcy means test works

On Behalf of | Feb 22, 2023 | Bankruptcy

Chapter 7 bankruptcy has helped millions of Americans, including many here in North Carolina, resolve their overwhelming debts and get a fresh start. But qualifying for this essential form of consumer bankruptcy is not automatic. Among other things, you must pass a means test first.

Since Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, bankruptcy courts have been required to impose a means test on Chapter 7 bankruptcy filers. The test’s purpose is to determine if you truly “need” Chapter 7 bankruptcy in the eyes of Congress. Chapter 7 bankruptcy is also known as liquidation bankruptcy because people use it to eliminate (or liquidate) many types of debts instead of being forced to repay them. Lawmakers believed some Americans were abusing the system by filing for Chapter 7 when they had the income and financial resources to repay their debts.

Income and expenses you must disclose

To begin the means test, the debtor must report their household’s current monthly income and expenses. The court then compares the income figure with the median income for households of the same size in the filer’s home state. The median income figure gets updated several times a year. You must disclose income from several sources, including:

  • Wages
  • Income earned from a business or rental property you own
  • Unemployment benefits
  • Pension and retirement income
  • Alimony, child support and any other money you receive to help with household expenses

Expenses you are allowed to report include:

  • Food, housing, utilities, clothing, out-of-pocket healthcare costs and transportation expenses like gasoline
  • Payments for secured debts like a mortgage or auto loan
  • Administrative expenses from your bankruptcy filing

If, after subtracting your expenses from your income, there is not enough disposable income left to pay at least 25 percent of your unsecured nonpriority debts over the next five years, you pass the means test.

Using bankruptcy to the fullest advantage

Proving that you qualify for Chapter 7 bankruptcy protection is just the first step. To get the most out of the bankruptcy process, it is best to work with an experienced bankruptcy attorney.