How the bankruptcy means test works

On Behalf of | Dec 27, 2021 | Bankruptcy |

Sometimes, consumers in Woodland Park, New Jersey, get overwhelmed with debt and consider filing bankruptcy. Consumers can remove certain unsecured debts, such as medical, in Chapter 7 bankruptcy by selling nonexempt property. However, not all consumers are eligible to file Chapter 7 and must meet the qualifications.

Overview of the bankruptcy means test

To prevent bankruptcy abuse, Congress implemented a means test as part of the Bankruptcy Abuse and Consumer Protection Act of 2005. This test determines a filer’s eligibility by calculating their disposable income to determine if they can pay debts. While it is designed to keep high earners from abusing the system, it doesn’t mean the filer must be destitute.

The filer has two chances to pass the means test, so even if they have higher wages they may pass. The first part of the test uses the average income of a similar household and compares it to the filer’s income. If they exceed the average, they proceed to the next step, which is deducting allowable expenses, such as food and rent.

Exceptions to the means test

Consumers who fail the means test can not file Chapter 7 and must convert to Chapter 13, a repayment plan, or dismiss the case. However, there are some exceptions to the means test that may qualify a filer with too much income. A filer with business debts may skip the means test if their debt is at least 50% of their income.

Filers who have been on active duty in the military or the National Guard since 9/11/2001 can commonly get exempted from the means test. While it doesn’t matter when the debt occurred, they must have been on duty for 90 days and they have 540 days to file.

Bankruptcy doesn’t remove all debts, but it can ease the burden. The process is complex, so a consumer should speak with a financial advisor.