If you have considered filing for personal bankruptcy, you may have heard about the Means Test. This test determines whether you must file for Chapter 7 or Chapter 13 bankruptcy. It takes into account income, expenses, and financial obligations to help ensure that bankruptcy relief is directed toward those who truly need it.
To help you prepare for your bankruptcy journey, let’s dive further into what you can expect from the Means Test.
What Is the Bankruptcy Means Test?
To help prevent fraudulency and abuse of Chapter 7 bankruptcy by higher-income individuals, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) was introduced in 2005. The test helps prevent this by comparing your income to your state’s median income and considering your essential living expenses to determine your disposable income.
What to Expect from the Means Test
Preparation is key in many facets of life, especially when it comes to easing one’s worries about embarking on a new journey. Knowing what to expect from the Means Test can help you feel more at ease about the road ahead.
The Means Test consists of two main steps:
Step 1: Comparing Your Income to Your State’s Median
In the first portion of the Means Test, it will assess your household income over the last six months. That includes everything from wages, bonuses, rental income, pension payments, and other sources of revenue. If, after this initial assessment, your income comes in below the median, you will automatically qualify for Chapter 7 bankruptcy. If the amount is above the median, you must move on to Step 2 to determine if you still qualify for Chapter 7.
Step 2: Calculating Your Disposable Income
In this portion of the Means Test, you can deduct allowable expenses from your income to help determine how much disposable income you truly possess.
Allowable expenses may include:
- Rent or mortgage payments
- Utilities
- Food and groceries
- Medical expenses
- Insurance premiums
- Child support or alimony
- Transportation costs
Despite your income not coming in below the median in the first portion of the test, you may still qualify for Chapter 7 filing if your income is low enough after deductible expenses. However, if you have a significant amount of disposable income, you may be required to file for Chapter 13 bankruptcy, which involves setting up a repayment plan over three to five years.
Why the Means Test Matters
Completing the Means Test plays a vital role in determining how you proceed with filing for bankruptcy. If the Means Test shows that you qualify for Chapter 7, you will be able to discharge applicable debts through the process. However, if you do not qualify for Chapter 7 through the Means Test, you will need to file for Chapter 13 bankruptcy. While Chapter 13 bankruptcy can still be of great help to those who are struggling financially, you will need to set up a manageable repayment plan as opposed to discharging your debt.
Why You Should Work with a Bankruptcy Lawyer
A bankruptcy lawyer can help you accurately assess your financial situation, properly complete the Means Test, and determine the best course of action for your debt relief needs.
If you’re considering filing for bankruptcy, consulting with an experienced lawyer can give you the clarity and guidance necessary to navigate the process with confidence.
Get Expert Guidance
If you are struggling with debt and considering bankruptcy in Maryland, Adam M. Freiman is here to help. With over 25 years of experience, he has helped individuals regain control of their finances and move forward with confidence. His expertise ensures that your case is handled efficiently.