Deciphering the Chapter 7 Means Test | Debts

Deciphering the Chapter 7 Means Test

Written by Chris Blanchet

Monday, 08 June 2009 14:17

by ChrisBlanchet

According to Chapter 7 Bankruptcy rules, the Court empowers a Trustee to liquidate the debtor's personal assets in order to repay the debt, at least partially. In most cases, filing for Chapter 7 results in the loss of assets so that your outstanding debt can be repaid.

Whenever someone files for Bankruptcy, he or she is subjected to a Means Test to determine whether the filer can indeed qualify under Chapter 7 or Chapter 13 bankruptcy rules. Here, we examine points that are specific to the Chapter 7 means test.

As far as the Courts are concerned, the Chapter 7 Means Test starts with the following measurements:

1.Your average income over the past six months. 2.Whether your average personal is above or below the median income of the State. For example, if the State's median income is $25,000, and yours is lower, you qualify for Chapter 7 bankruptcy. If your income is higher, than additional calculations need to be made.

If your average personal income is more than the State's median, then the Chapter 7 Means Test will be expanded. These extra processes will look at the following:

1. The courts will take your income and subtract allowable expenses. This will result in a disposable income figure that the courts will multiply by 60 in order to obtain a 5-year figure. 2. The second part will compare your five-year income against the State's median 5-year income. If your amount is greater than the State's median by $10,000 or more, then you will not qualify under the Chapter 7 Means Test (although you will likely qualify under Chapter 13).

As well, your disposable income should not exceed 25% of your unsecured debt. If it does, then you will not qualify for Chapter 7 Bankruptcy (Chapter 13 might still be an option).

You can complete these calculations yourself before sitting down with a bankruptcy trustee or professional, who is compensated on your choosing to file for Chapter 7 or Chapter 13 bankruptcy. However, if your own calculations come close to the State's median, you should definitely seek professional assistance as they will need to complete these calculations anyway.

Of course, Chapter 7 and Chapter 13 bankruptcy should only be a last resort given the short- and long-term damage it causes to your credit score, finances, and emotional state. If you have the ability to repay your debt on a fixed schedule, you should explore such options before resorting to bankruptcy.

DISCLAIMER: This article is provided as information only and is not to be taken as financial advice.

Chris Blanchet is the author of the Personal Finances e-book Help Fix My Finances, which provides the basis for the Members Only website of the same name. Be sure to visit his Debt-Free Blog.