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What is the Chapter 7 "means test"?

When people in Eastern Tennessee consider bankruptcy, one of the first questions they ask is whether they should file under Chapter 7 or Chapter 13. Under Chapter 7, many of the family's debts will be discharged, that is, the debt will never have to be repaid in full. Under Chapter 13, the debtor files a plan under which all existing debts will be paid over time and the total balance due may be reduced. Many people naturally find Chapter 7's discharge procedure to be an attractive alternative, but not everyone is eligible to file under Chapter 7. In 2005, Congress, fearing that too many debtors with reasonable incomes would choose Chapter 7, imposed what is called a "means test." The means test is intended to ensure that persons with above-average incomes cannot use Chapter 7.

The means test involves a two-step analysis of the debtor's finances. In step one, the debtor must demonstrate that his monthly income for the past six months is less than the median income for his state of residence. The maximum median income allowable for a Chapter 7 filing varies by family size. Specific information regarding median incomes for every state is widely available on the internet. The calculation of income for the means test must include wages, salary, tips, gross income from a business, interest, dividends, royalties and other sources of income.

If the debtor's average income is less than or equal to the state's average, the debtor must still pass step two of the means test. All allowable expenses, both actual and standardized, are subtracted from the debtor's income to determine disposable income. If the debtor's disposable income is sufficient to repay at least a portion of unsecured debts in a Chapter 13 repayment plan, the debtor cannot file under Chapter 7.

Satisfying the means test can be a complex process both in assembling the required information and presenting it in a manner that will have the highest chance of satisfying the test. The services of an experienced bankruptcy attorney can be very helpful in understanding the means test and satisfying its requirements.

Source: FindLaw, "The Bankruptcy Means Test," accessed on March 24, 2018

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