While everyone can file for bankruptcy protection, Chapter 7 is restricted by a means test. Chapter 7 bankruptcy completely erases debts without requiring you to enter into any kind of a payment plan, so the law demands you must fall below certain income and asset levels before you are allowed to take advantage of this form of relief.
The test isn’t complicated.
First, determine if your income falls below state median income levels. You can use this chart to find out. Much depends on family size. In Pennsylvania a single filer living alone would need to make less than $49,400 to pass this part of the means test. But if the filer has 4 people in the household he or she could make up to $89,111.
In New Jersey, a single filer can make up to $61,347. A filer with four people in a New Jersey household can make up to $111,088.
The figures are different because the median income in each state is different.
You will have to put together a schedule of your income and expenses. It is one of many types of documentation you’ll have to produce or put together during your bankruptcy filing.
There are two types of expenses.
“Allowable” expenses are what you need to survive. This covers rent or mortgage payments, utility payments, grocery payments, medical bill payments, insurance premiums, clothes, and other normal expenses. Everything else is “disposable” income. If you have too much disposable income you might not qualify under the Chapter 7 means test even if you make less than your state median income.
It’s a good idea to go through this schedule with an experienced bankruptcy attorney. It’s really easy to forget things, which could throw off the entire test.
What happens if you fail the means test?
It’s not the end of the world. It just means you’ll be filing Chapter 13 bankruptcy instead of Chapter 7.
Of course, it’s a good idea to review the schedule one more time to make sure before you simply resign yourself. As mentioned, it’s really easy to overlook some allowable expenses. What you don’t want to do is get overzealous, or too creative. That could open you up to an accusation of bankruptcy fraud.
Remember, Chapter 7 isn’t right for everyone.
It certainly sounds nice to discharge all your eligible debts without having to pay another dime for them. For some people that is precisely the right choice.
But if you want to keep a house out of foreclosure or keep a car that’s in danger of being repossessed, Chapter 7 usually isn’t the right move. Unless they are already protected by exemptions, these assets can only be preserved by filing for Chapter 13 bankruptcy protection.
During Chapter 13 your trustee will still take your allowable expenses into account when setting up your payment plan. You will pay a set amount for up to 5 years, and then you’ll be done. The remaining balances on your eligible debts will be discharged. This means your debtors get some money, but you get some breathing room. The courts call it the “wage earner’s plan,” though obviously you can earn wages on Chapter 7, too.
Not sure which type of bankruptcy is right for you?
Whether you’re struggling to decide if you qualify under the means test or you’re trying to decide if Chapter 13 is the better long-term financial move, we can help. You should never try to file for bankruptcy on your own anyway, and these are exactly the sorts of issue qualified bankruptcy attorneys can help you tackle.
Besides, we offer free consultations and payment plans, which means the only thing you have to lose by calling us is a whole lot of debt.