What is the means test of Chapter 7 bankruptcy?

On Behalf of | Jul 2, 2021 | Chapter 7 |

Bankruptcy is an effective legal and financial tool for individuals who are struggling with debt. As Long Island residents may know, there are different forms of personal bankruptcy that can serve the needs of different debtors. Those forms are Chapter 7 bankruptcy and Chapter 13 bankruptcy.

This post will discuss a critical component of Chapter 7 bankruptcy, known as the means test. Although readers are encouraged to use this informational post as a starting point to learn more about bankruptcy, they are reminded that this post does not offer any specific legal advice. When questions and concerns about debt arise, it is beneficial for individuals to speak directly with trusted New York-based bankruptcy lawyers.

Income comparisons and the means test

The means test is an assessment that can qualify or preclude an individual from filing for Chapter 7 bankruptcy. To qualify, a person must have a sufficiently low income and the means test helps establish their income threshold. The first part of the means test compares the debtor’s average income for the preceding six months to that of the median income of their state. If the debtor’s income is at or below the state’s median, then the debtor may qualify for Chapter 7 bankruptcy protections. If it does not, the debtor may have to move to the second part of the means test.

Disposable income comparisons

If a debtor does not pass the first part of the means test, they can attempt to pass it through the second step. This step assesses how much disposable income a debtor has to pay off their debts. If they have disposable income that can cover some of their unsecured debts, they may be ineligible for Chapter 7 bankruptcy.

Understanding personal bankruptcy rules and qualifications can be tricky. Debtors do not have to undertake these important processes on their own. Their bankruptcy attorneys can guide and advise them of their rights and options.