Can You Pass the Chapter 7 Bankruptcy Means Test?

Bankruptcy is just another tool that is available to the American public to help them reorganize their finances and to start fresh; with the last recession affecting many families, bankruptcy has become more common than ever. In 2011 alone, there were 1.37 million people who filed for bankruptcy.

Unfortunately, while this legal tool is very helpful to Americans who have real financial struggles, it is also open to abuse. Just last July, 50 Cent filed for Chapter 11 bankruptcy in what appears to be a move to delay or minimize the damages he has to pay after losing a lawsuit.  Because of this, people are skeptical if 50 Cent is indeed broke or just exploiting a legal loophole.

Fortunately, 50 Cent was only able to file for Chapter 11 and not Chapter 7 where a lot of his debts could have been written off. But why did 50 Cent and other celebrities (except for Gary Busey) do not file for Chapter 7 instead?

That is because before you become eligible for Chapter 7 protection, you have to pass a means test first. The means test determines if your income is low enough that you cannot reasonably meet your debt obligations.

But what does it take for you to pass the Chapter 7 bankruptcy means test?  How will you know if you are actually eligible to take advantage of its protections?

That will all depend on your own income and how it compares to the state’s median income. You have to keep in mind, though, that your income will be compared to households that are similar with yours within the state. So if you have a family of 4, then your income will be compared to the state’s median income for a family of 4 within the state.

If Your Income is Below the State’s Median Income

If your income falls below the state’s median income within the last 6 months before filing for Chapter 7 bankruptcy, then you have automatically passed the means test. This means that you are now qualified for the protections of Chapter 7 bankruptcy without the need to fill out the rest of the means test form.

If Your Income is Above the State’s Median Income

If your income turns out to be higher than the median income of the state, do not despair yet. This does not mean that you automatically fail the means test for Chapter 7. What you should do is complete the means test form to include your expenses. Depending on your area, the means test may use the IRS local or national standards to determine your living expenses which should include food, rent, gas, utilities, and clothing. This will give them an idea of how much your disposable income would be. If your expenses are higher than the standards, you cannot use them to lower your disposable income. In some cases, however, you may be able to deduct some expenses like mortgage, car payment, heath insurance, child-care, and taxes.

If you still did not pass the means test, you may have to seek other options like filing for Chapter 13 instead to restructure your debts. Consult an expert bankruptcy lawyer to know your best legal option.