In order to be able to file for a Chapter 7 bankruptcy, a person must qualify under the Chapter 7 “means test”, which aims to keep people with a high income and few expenses from discharging a large portion of their debt via a Chapter 7 bankruptcy. Chapter 7 bankruptcies are for people who have no real options to pay back their debts. If a debtor has at least some income available to repay debt, the means test may push him or her into filing for a Chapter 13 bankruptcy.
The means test is flexible, though, so even if you have a stable monthly income, you may be able to qualify if your expenses are high enough. Deciding which bankruptcy to file is an important decision that you should make only after carefully consulting with a bankruptcy attorney and reviewing your financial situation. A Morris County bankruptcy lawyer is available to help you determine how the Chapter 7 means test affects your bankruptcy eligibility.
Steps of the Chapter 7 Bankruptcy Means Test
First, the means test is for people with consumer debts such as debt for cars, homes, medical bills or personal loans and not business debt. The next step is to find out the median income level for a household of your size in the state where you live. If your currently monthly income is less than the median for your state, you pass the means test and can file for Chapter 7 bankruptcy.
For New Jersey, November 2010 median income levels were as follows:
- Single person household – $58,107
- Two person household – $69,539
- Three person household – $84,192
- Four person household – $99,474
If your income level is above the median for your state, you have to make additional calculations to determine whether you pass the means test. The first figure to calculate is your disposable income. This is your current monthly income (your average income over the six calendar months prior to filing for bankruptcy) less your monthly expenses. Not all monthly expenses count, however, as the IRS determines the ones that matter.
What determines whether you pass the means test at this stage is how much disposable income you have each month and whether that amount is enough to pay off at least some of your debt. If you do not pass the Chapter 7 bankruptcy means test, you will only be able to consider filing for a Chapter 13 bankruptcy. Contact a Morris County bankruptcy attorney at Ast & Schmidt, PC to learn how the Chapter 7 means test will affect your ability to file for bankruptcy.