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What is the means test for Chapter 7 bankruptcy?

We often write on our Wayne County bankruptcy law blog about the similarities and differences between Chapter 7 and Chapter 13 bankruptcy. Just in our last post we referred briefly to the means test required in order to file for Chapter 7 bankruptcy, which is not a prerequisite for Chapter 13. Because this is an important distinction, let's take a closer look at the means test in this post -- with the understanding that this is simply a general review and does not constitute specific legal advice.

The first part of the test compares your average income over the last six months against the median family income in that state. It's worth noting that "income" in this calculation includes sources you might not typically consider as income. Besides salary and wages, business income, and income from a rental property, it includes child support and alimony, for example, as well as unemployment and workers' compensation benefits.

If your average income is higher than the family median income, you need to go on to step two. In this step, the court will review whether you would have the "means" to repay some of your debt in Chapter 13 using your disposable income. If so, you fail the means test for Chapter 7. In other words, the law considers that you have the "means" to deal with your financial challenges without Chapter 7 bankruptcy protection.

Of course, at that point, Chapter 13 would still be an option. So it's crucial to understand that the means test doesn't preclude you from filing for bankruptcy entirely. It just rules out Chapter 7.

Years ago, courts had broad leeway in deciding who qualified for Chapter 7 and who didn't. But since the passage into law of the Bankruptcy Protection Act of 2005, the means test became the standard for Chapter 7. Today, Wayne County residents have options when it comes to filing for bankruptcy, but they should understand that some are more difficult to qualify for than others.

Source: Findlaw.com, "The Bankruptcy Means Test," accessed on Aug. 16, 2014

Source: Findlaw.com, "The Bankruptcy Means Test," accessed on Aug. 16, 2014

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