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How does the means test work?

On Behalf of | Nov 2, 2022 | Bankruptcy, blog

When Congress altered the bankruptcy laws in the early 2000s, it changed eligibility to file for Chapter 7. Now, you must undergo a means test to ensure you meet income limitations for filing. If you fail the means test, you will not be able to file Chapter 7.

The reasoning behind this is that Chapter 7 erases debt. Congress intended for people to not use bankruptcy to get out of paying for debt. Instead, they wanted people to file Chapter 13 or the repayment plan so that creditors can get some money paid back when filers have the means by which to make payments. So, people who have the financial ability to do a payment plan will fail the means test and have to file Chapter 13.

How it works

The means test will look at your income and expenses. It will allow for some exemptions and take into account your necessary expenses to come to your useable income for the test. Then, it will compare that figure to the median income in your state based on the size of your household. This will be different for every state.

The result

If your income is lower than the median, you will be allowed to file Chapter 7. If it is over the median income, then you will have to consider a different type of bankruptcy. Typically, most people will then file Chapter 13. Chapter 13 will not liquidate your assets, pay back the debts and dismiss outstanding debts. It will involve you creating a plan to repay as much of your debt as possible with the court dismissing outstanding debt after you complete the plan.