If you’re thinking about bankruptcy, one of the things you need to know about and understand is the bankruptcy means test. This is the test that determines if you are eligible for Chapter 7 bankruptcy. If you are, then you can have some of your debt forgiven. If you are not, you have to file for Chapter 13 bankruptcy, which only restructures your debt instead of fully eliminating or greatly reducing it.
Usually, only those who have mostly consumer debts (credit cards, medical debt, etc.) take the means test. Those who enter into Chapter 13 bankruptcy may actually need to go through the means test as well because it’s often used to create the repayment schedule.
What Information Do You Provide?
To determine if you pass the bankruptcy means test, you will have to provide your expenses, your income, and the size of your family. It’s very important that you are honest and accurate with your responses. If you aren’t, you can be convicted of bankruptcy fraud because it could mean you have debt forgiven that should not have been. The means test is simply a way for the courts to impartially and fairly determine if you have any disposable income that could be used to pay off your debt.
The Two Parts of the Test
There are two parts to the test. The first part looks at your overall household income and compares it to the state’s average income. For this, you will need to submit everything related to your income. For most, that’s their pay stubs, tax returns, or W-2 forms. For those who are self-employed or contract workers, this can mean business tax returns, proof of income, and bank statements. You only need to submit income records from the preceding six months unless you have had a major change in income, such as losing a job or getting a new job.
If your income is below the median income, you can file for Chapter 7. If it’s not, you need to move on to the second part of the means test. In this part, you will need to submit all of your expenses for the previous six months. This includes your rent, medical costs, utilities, groceries, and anything else that falls under the “allowable expenses” category. This is then subtracted from your household income to determine your disposable income.
You want to make certain you’ve included every expense that is allowed and that you don’t include anything that should not be on the list. If you do, it could invalidate your bankruptcy case or, again, lead to bankruptcy fraud charges. Depending on what your disposable income is, you may be allowed to file for Chapter 7 bankruptcy, or that amount may be used to determine your Chapter 13 repayment schedule.
It can be hard to know what to include on the means test paperwork, which is why it’s helpful to have an experienced bankruptcy attorney on your side. Contact the office of Michael F. Kanzer & Associates today to learn more about bankruptcy and schedule a free consultation.