In our last post, we compared the two principal bankruptcy provisions used in personal bankruptcies, Chapter 7 and Chapter 13 of the federal Bankruptcy Code. Debtors usually prefer filing under Chapter 7 because it can result in the discharge of virtually all of the person's debts, while Chapters 11 and 13 will produce plans in which the bankrupt's debts are merely reorganized for payment over the next three or five years. Anyone who wants to utilize the discharge feature of Chapter 7 should understand the so-called means test.
The means test says that anyone who earns more than Tennessee's median annual income cannot file for bankruptcy under Chapter 7. The income limits prescribed by the means test are $39,759 for a one-member household up to $111,405 for a household of 10 persons. If a person whose income exceeds the annual limit wants to file under Chapter 7, that person must perform a more detailed calculation of annual income.
The first step is collecting the documents necessary to provide the information. Income includes all sources, including business income, rental income, interest and income from pensions and retirement plan. The means test permits the prospective Chapter 7 filer to deduct certain expenses in calculating income. Many of these expenses are set by state or federal law. If the re-calculated monthly income is less than $7,475, the person passes the means test and can file under Chapter 7. If the re-calculated monthly income exceeds $12,475, the person is barred by the means test from filing under Chapter 7.
An important caution should be kept in mind. Merely because a person passes the means test does not mean that the person should file under Chapter 7. Before choosing Chapter 7, a person should consult an experienced bankruptcy attorney for advice on the various advantages and disadvantage of filing under Chapter 7 or Chapter 13.