One of the most popular individual types of bankruptcy is the Chapter 7 bankruptcy. This isn’t much of a surprise, considering a Chapter 7 bankruptcy ends in all of your unsecured debt being forgiven. However, to prevent an outright abuse of the system, congress formed the “income test,” sometimes referred to as the means test. This means test was introduced during the modification of the bankruptcy law in 2005.
What is the Means Test?
When you begin the process of filing for bankruptcy, you will have to fill out Bankruptcy Form 122. This form will take into account your income and determine whether or not you are eligible to file for Chapter 7 bankruptcy. If you are under the income limit for Chapter 7, you may qualify. If not, there’s a second part of the means test.
In the means test, the size of your household matters. You can only earn a certain amount of money over the poverty line to be eligible for Chapter 7 bankruptcy, but that number increases with every dependent you have living in your house. So, even if other members of your household aren’t filing for bankruptcy, it’s best to include their income in the bankruptcy filing details. A bankruptcy attorney can help you make sure you do not miscalculate your household size.
When you’re calculating the means test for your Chapter 7 bankruptcy, you should note that the result from this calculation will compare your average household income to that of your state. The exact state median household income used in the comparison is determined by the Census Bureau Data.
Where Can I Get the Forms I Need for a Chapter 7 Means Test?
Need a copy of the means test? Download a copy of the means test by going to the United States Court’s website. It’s easy to access, and you can download it, print it, or fill it out electronically. You should also be able to get it from your local Court House. Regardless of how you access the document, make sure you completely fill it out before submitting it. It’s also important to be fully transparent when submitting this paperwork. Should it be determined that you either lied or hid some information from the court, you risk your case being dismissed, or worse, fines and jail time. Being fully transparent gives you a better chance of successfully completing your Chapter 7 Bankruptcy process.
What Is Considered Income for the Means Test?
Your primary form of income is an obvious amount you would need to enter for the means test. The test takes your gross income (income before taxes). In addition, often social security retirement income and disability income may not be considered income. The form will ask you to determine your income for the 6 months prior to filing for bankruptcy. To best estimate your monthly income, the form recommends that you add the income that you made over the previous 6 months and then divide it by 6. This will give you the most accurate average monthly income. The income should include your wage or salary, along with any tips, bonuses, overtime, and commissions you made on top of your wage/salary. Be sure to include these extras as best you can.
You will also need to provide income information for your spouse, even if they are not filing for bankruptcy. The same information as stated above will be required for their income as well.
Here is an exhaustive list of forms of income that are required to be reported on your means test:
- Annuity payments
- 1099 Income
- Dividends, royalties, and interest
- Retirement income
- Unemployment compensations
- Child support
- Your net business operating income
- Compensation benefits issued to workers
While you do have to report your Social Security Income, it is luckily not considered when determining eligibility for Chapter 7 bankruptcy.
It’s important to keep in mind that passing the means test does not guarantee you a Chapter 7 bankruptcy approval. The courts will also look at how much disposable income you have compared to your expenses. If you have a substantial amount of disposable income (income not needed for monthly living expenses and minimum payments on debt), and not much debt or expenses, they may deny your case, forcing you to choose Chapter 13 bankruptcy instead.
What If I Don’t Pass the Means Test?
You can often take a bankruptcy means test calculator to help estimate Chapter 7 bankruptcy qualification. If you did not pass the Chapter 7 bankruptcy means test, then you will have to submit another form that evaluates your disposable income. You can calculate your disposable income by deducting certain expenses from your monthly income. Your application for bankruptcy may be denied if your disposable income is above a certain amount. But if it’s below an amount specified by the bankruptcy court, there’s still a chance that you will be eligible for certain bankruptcies.
Here are the expenses you can deduct when calculating your disposable income:
- Childcare Expenses
- Taxes on your income
- Contributions made into charitable causes
- Premiums paid for disability and health insurance
- Compulsory deductions e.g., union dues, retirement contributions, etc.
You may also be permitted to deduct some normal expenses. However, when deducting living expenses, you’ll need to provide proof of the amount you’re claiming.
The living expenses you can deduct include:
- Money spent on clothing
- Expenses on housekeeping supplies
- Cost of Food
- Health expenses that are paid out of pocket
With these deductions, it’s possible that you may be approved for Chapter 7 bankruptcy, depending on the stipulations of your local government. Again, make sure you are honest in your assessment of your expenses. Exaggerating your expenses may lead to a deeper investigation into your case, which could lead to dismissal, fines, or even jail time. You will be expected to be able to produce proof of the expenses you report, so don’t report anything you don’t have a way to prove.
What If I Pass The Means Test?
If you pass the means test, it is likely (though not guaranteed) that you will be eligible to file for Chapter 7 bankruptcy. Once you have been approved, you will begin working with a bankruptcy attorney and trustee. The trustee will begin liquidating your assets to pay off your existing debt. Once the assets that are eligible for liquidation have been sold, your creditors will be paid off to the fullest extent possible. Once this is complete, your remaining debt (often includes outstanding debt collection lawsuits) will be discharged and your case will be closed. While this is an incredibly brief overview of what the Chapter 7 bankruptcy process looks like, it does give you a good idea of what to expect once you pass the means test.
Though bankruptcy can be daunting, it can also be one of the best tools to get you back on track and out of debt, setting you up for a better financial future. One of the first steps in Chapter 7 bankruptcy is the means test. Make sure the form you submit is complete and honest.