Bankruptcy Law: The Chapter 7 Means Test

You’ve decided that declaring bankruptcy may be in your best interest…Now what?

There are many things you must consider before going forward with declaring bankruptcy; but chief among them is to determine whether your income level even qualifies you to do so.

As Beloit Bankruptcy Attorneys, conducting a simple test, called the “Chapter 7 Means” test, is often an early step in beginning any attorney-client relationship.

The Chapter 7 Means Test is used to determine whether an individual’s income level is low enough to qualify for filing Chapter 7 Bankruptcy. Essentially, the test is a formula intended to keep higher-income filers from filing for Chapter 7, as Chapter 7 is intended for those who truly cannot pay their debts.

The Process for determining eligibility for Chapter 7 is straightforward and conducted in two possible steps.

In order to accurately complete Step 1, please remember that median income levels vary by state and household size. Our Beloit audience should be sure to speak with an experienced Beloit Bankruptcy Attorney in order to obtain relevant, region-specific information.

If it’s determined that your income is below the median income level, you qualify for Chapter 7. That’s it.

However, if your income is above the median income level, an additional step is required.

From your total income, subtract certain allowable expenses — as determined by the IRS — in order to get your ‘disposable income.’

The national standards for disposable income are as follows:

• Food, clothing, household supplies, personal care, and other miscellaneous items
• Health Care
• Housing
• Automobile
• Taxes
• Childcare
• Other additional expenses (a qualified bankruptcy attorney can help determine these.)

Now, after having subtracted all allowable expenses, if your income falls below the median level, you qualify to declare Chapter 7 Bankruptcy.

If, however, your income remains above the median level, your next option is to consider Chapter 13 Bankruptcy, a debt consolidation and restructuring form of bankruptcy.

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