Understanding the Means Test

If you are considering filing for (personal) bankruptcy, understand that you have two options: a Chapter 7 filing or a Chapter 13 filing. While these two types of bankruptcy have the same aim – discharging your eligible debts and freeing up your financial situation – they go about it differently. 

 

Chapter 13 bankruptcy (often called “restructuring”) involves a 3-5 year payment plan, in which you attempt to pay back your creditors to the best of your ability (under the recently enacted CARES act, payment plans may be extended 

Chapter 7 bankruptcy occurs over a period of several months. It is often called a liquidation bankruptcy because creditors are allowed to take back certain non-exempt assets (collateral) in order to satisfy debts. A Chapter 7 bankruptcy is closer to people’s common notion of what a bankruptcy is, and is attractive because of the relatively short time it takes to complete.

 

How Do You Complete the Means Test for Chapter 7 Bankruptcy?

Not everyone is eligible for a Chapter 7 bankruptcy. To find out if you are eligible, you must take what is called the “means test.” The means test has two parts. 

 

Means Test – Step 1

In the first step, you will determine your annual income and compare it to a similarly sized household in your state. For example, let’s say the median income in Michigan for a one-person household is $30,500. If you can show that your annual income is $30,499 or less, then you have passed the means test and are eligible for Chapter 7 bankruptcy. If your annual income is higher than the median, though, you must proceed to step two. 

 

Means Test – Step 2

The second part of the means test is more complicated than the first. Because you make more than the median income of a similarly sized household in your state, the federal government wants to make absolutely sure that it isn’t feasible for you to pay back any of your creditors. 

To start step two, you must gather a significant amount of documentation that shows your expenses going back the last six months. You need to determine which expenses are “allowable” (essential) and subtract that from your income. What you have left is considered your disposable income. You will need to consider both national and local standards when determining which expenses are allowable, but they usually include food, shelter, clothing, medicine, and other basic needs. 

If your disposable income is low enough, you have passed the means test and are, therefore, eligible for Chapter 7 bankruptcy. However, this does not mean that Chapter 7 is the best option for you – especially if you want to keep all of your assets. 

Filing for Bankruptcy? Contact Maxwell Dunn PLC

Bankruptcy is a major, but often necessary, disruption that should only be done after you have considered all options. The team at Maxwell Dunn, PLC is well-equipped to look at your situation and come up with the best path forward for you. Get in touch with us through our website or by calling 248-949-1042.