How The Bankruptcy Means Test Helps Estimate Chapter 7 Qualification

Chapter 7 Qualification

If you are past the point of avoiding bankruptcy and are worried about what Chapter 7 bankruptcy will look like, there’s one thing you’ll need to figure out first: whether or not you pass the Chapter 7 means test. Chapter 7 means test is a government formed requirement that everyone seeking a Chapter 7 bankruptcy discharge must take.

The means test is split into two parts. The first one makes use of IRS expenses to vet if you qualify for a bankruptcy discharge. The other part makes use of your actual expenses.

Chapter 7 Means Test Calculator uses the same protocol as the US bankruptcy forms–ensuring that you get a perfect prediction to know if you’ll be getting a discharge. In designing out Chapter 7 means test calculator, we used the Chapter 7 Statement of Your Current Monthly Income (Form Number: B 122A-1), while for the Above median Chapter 7 calculator, we used the Chapter 7 Means Test Calculation (Form Number: B 122A-2).

What is the Bankruptcy Means Test and How Does Means Test Calculators Work?

Succinctly, the bankruptcy means test is a system that helps bankruptcy courts determine who qualifies for a debt discharge. The test does this by determining debtors that have the means to pay their debt but are just lackluster about it. You can think of it as a mechanism for choosing who qualifies for bankruptcy. It’s important to keep in mind that these requirements may vary from state to state. For instance, a bankruptcy means test calculator in Georgia may look a little bit different from a bankruptcy means test calculator in Indiana potentially because of different income

Chapter 7 bankruptcy is primarily characterized by selling non-exempt properties and distributing funds to creditors owed. Before a debtor can qualify for Chapter 7 bankruptcy, then they must first meet income guidelines provided by the state law.

A means test calculator that makes use of the most recent Census Bureau Median Family Income can help estimate qualification. The current figure on our bankruptcy calculator is the most recent, and it was provided by the United States Department of Justice.

Before coming into effect, a Chapter 7 means test will first check out your median monthly earnings for six months before filing for an extension. It’ll then compare the figure obtained with your state’s average income.

You can see the exact verbiage of the abnkruptcy form (Official Form 122A–1) that shows that you would enter your average monthly earnings that you received from all your different income sources. These figures would be used for six months priority to filing your bankruptcy petition,

Part 1: The IRS Figures

Suppose your current monthly income is not more than your state’s median income for your household size. Or if your monthly income falls below your state’s average monthly income. Then this means that you’ve passed the means test, and you may qualify for a Chapter 7 bankruptcy discharge.

For example, at the time of this writing, the Bankruptcy means test in Michigan income limit for a household size of 2 is $67,015.

However, you should have it in the back of your mind that this test doesn’t automatically guarantee qualification for Chapter 7 bankruptcy. Chances are high that you’ll be made to fill other forms to vet your income. Some of those forms include Schedule I, Schedule J, and an expense form. In an instance where you have a significant sum left as your disposable income after paying important monthly expenditures. Then the court may dig deeper into more information about your finances.

Part 2: Your Actual Expenses

There are instances where the court may permit you to take advantage of expenses like mortgages, health insurance payments, childcare, and some taxes to pass your means test. And this is done by deducting those expenses.

Let’s take this example to help you understand: Assuming you’re a high-earning debtor that earns above the state’s median income for your household size. Then you may still pass the means test, provided that you’re able to deduct those actual expenses.

The expenses you’re allowed to deduct on the means test include

  • Income taxes
  • Child Care expense
  • Child support payments and alimony
  • Contributions for charitable causes
  • Secured debt payment for your home and car
  • Term life insurance premiums
  • Compulsory employment contributions, such as retirement accounts, uniforms, and union dues.

Beyond the expenses given above, there’s more. However, it’s imperative to note that you’ll be tasked with proving those expenses claimed during your means test. Additionally, it’s not all living expenses that are deductible, but some like the following are:

  • Utility + Housing expenses
  • Clothing
  • Food
  • Transportation expense

The expenses given above are limited by specific amounts, according to your household size. You should check relevant platforms or with your bankruptcy lawyer for current national standards on allowable living expenses deductions.

An Above the median calculator linked may use the second part of the means test and help estimate qualification, through this bankruptcy form: Statement of Exemption from Presumption of Abuse Under §707(b)(2) and Chapter 7 Means Test Calculation.

In Conclusion

The bankruptcy means test is complex. The complexity lies in two parts of the bankruptcy means test and how income is calculated. Hopefully, you are now equipped to understand how the means test works.