What Is The Chapter 7 Bankruptcy Means Test?

Background To The Bankruptcy Calculator Means Test

In today’s tough economy, many people have been hurt financially. A job loss can send someone on a downward spiral, where accumulating debt gets out of control. High medical bills can do the same thing. For some, the only option is declaring bankruptcy.

Chapter 7 is the most common bankruptcy in the United States. It is liquidation bankruptcy, where all debt is discharged and the person can begin anew with a clean slate. However, some people began to abuse Chapter 7 bankruptcy, using it when they actually had the means to pay back some of their debts. In 2005, Congress stepped in.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 meant that prior to filing for Chapter 7 bankruptcy; a person would have to undergo a bankruptcy means test. This test was meant to filter out people who had the money to pay off some of their debt, but wanted the somewhat easier route of declaring bankruptcy. The bankruptcy calculator test is there to make sure that if you are filing to have all your debts wiped out, that you truly qualify for this massive step.

Do I Have To Undergo The Bankruptcy Means Test?

If you are filing for Chapter 7 bankruptcy, the answer is yes. However, it is not that you won’t be allowed to declare bankruptcy at all if you do not pass the means test. It just means that Chapter 7 is not the right course of action for you.  This is not the end of the road, but what it does do is rule out this chapter, all other alternatives and chapters now need to be explored.

Failing The Chapter 7 Bankruptcy Means Test

In many cases where someone fails a chapter 7 bankruptcy calculator test, they will go on to file chapter 13 bankruptcy instead. Chapter 13 bankruptcy is a reorganization of your debt. You must attend a credit counseling service, and present the bankruptcy court with a repayment plan. The plan usually takes 3 to 5 years to complete. During those years, your creditors will cease all collection activity on you, and you will learn new ways of managing debt. Chapter 13 bankruptcy makes it more likely that you will be able to hold onto your home and any vehicles you might have.

The basis of chapter 13 is an agreed payment plan.  In many cases an attorney will on your behalf agree with your creditors an acceptable payment plan.  This plan can last up to 5 years.  In some cases the individual themselves contacts all creditors and negotiates a payment plan directly with them.  This is not advisable if you do not feel strong enough or confident enough to deal with your creditors, who as you will know by now can sometimes be less than friendly and amicable.

The Chapter 7 Bankruptcy Means Test Will Verify Your Income

If your annual income is less than your states median annual income, you will still qualify for Chapter 7 bankruptcy. In fact, the bankruptcy means test gives debtors three chances to qualify for liquidation bankruptcy.

The means test will also calculate the available income you will have over a 60-month period to repay your debts. If you have enough, you more than likely will have to file for Chapter 13 bankruptcy. The third part of the bankruptcy means test expresses your debt as a percentage. If it is higher than 25% of your available repayment income, you will then qualify for Chapter 7 bankruptcy.