How does the bankruptcy “means test” work?

| Sep 11, 2020 | personal bankruptcy |

When people with overwhelming debt consider bankruptcy as a way to restore their financial stability, they must first take a means test, which determines whether they meet income requirements to qualify for Chapter 7 bankruptcy.

The test was designed to lower the number of people eligible to have their debts forgiven through Chapter 7. However, most who take the test pass it without an issue. Debtors who don’t qualify, or those who want to retain certain assets, can instead choose Chapter 13 to restructure their debt.

A two-part process

While there are only two components of a means test, the process can be complicated and confusing. It’s a good idea to work with an experienced bankruptcy attorney to avoid costly mistakes that can disqualify you. The means test looks at:

  • Income: The first part determines whether your income is below Illinois’ median income, which stands at $54,877. The means test is based on the past six months, so after adding income from that period, you simply double the amount to see whether you are below the state median.
  • Expenses: Next, list all allowable expenditures, such as medical costs, rent, groceries and clothing. It’s crucial to include every eligible expense as failing to do so could result in your case being denied. Allowable expenses are based on federal and state standards. Your lawyer will make sure all these expenses are properly documented.

The amount, if any, that’s left over after subtracting expenses from earnings is known as disposable income, which can be used for paying off debt.

What are the next steps?

Passing the means test allows you to file for Chapter 7, which discharges most unsecured debts, such as credit cards, personal loans and medical bills. Failing the test means your only likely option is Chapter 13, which allows you to pay off debts over three to five years.

Once you get your means test results, your attorney will work with you to determine the best route to restoring your credit, whether it’s through Chapter 7 or Chapter 13. While many people are reluctant to go through this process, taking these steps as soon as possible is the best way to protect your credit and rebuild your financial future.

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