Those wishing to file for Chapter 7 bankruptcy must pass what is known as a “means test” before they are deemed eligible for this method of debt resolution. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 established the means test in order to prevent those with higher incomes from eliminating their debt completely. These parties are allowed to file for Chapter 13 bankruptcy, instead, under which they can restructure their debt repayment plans.
The means test serves to counter bankruptcy abuse by those with incomes sufficient to pay off specific portions of their debts. People with incomes below the state’s median income are not required to take the means test to be eligible for Chapter 7. Those with incomes higher than the median, however, must comply with the terms of the exam.
There are several steps to taking a means test. While there are calculators available online that will automatically calculate one’s test results, some may wish to understand exactly how the test works.
First, you will need to calculate your current monthly income (CMI). This number simply is the sum of you average income (as taken over the past six months), your spouse’s average income, and any other financial contributions toward your personal expenses.
Next, you will compare your household income with your state’s average income for other families your size. If your income is lower than the median, then you automatically pass the test and your Chapter 7 filing may proceed. If your household income is higher, however, you must use your net monthly income to determine your eligibility status.
Net monthly income (NMI) is a family’s CMI less any exemptions they may have. Once your family’s NMI has been calculated, it is used to determine whether or not you can pay off a significant amount of your debts within the 5 year payment period of Chapter 13 bankruptcy. If you cannot, then you may file Chapter 7. If you can, however, then you must use Chapter 13 for your debt resolution.
If you would like to learn more about the means test, or if you are considering filing for Chapter 7 bankruptcy, then Birmingham bankruptcy lawyer Paula Greenway can help. Contact her today at [phone-number].