Why do you need to pass a means test for Chapter 7 bankruptcy?

On Behalf of | Jan 7, 2022 | Chapter 7 |

There are many different kinds of bankruptcy, but the average individual will likely choose between Chapter 13 bankruptcy and Chapter 7 bankruptcy. Both of these forms will provide an automatic stay to temporarily stop collection activity. If successful, both Chapter 7 and Chapter 13 bankruptcies will lead to a discharge of someone’s remaining unsecured debts.

However, in a Chapter 13 filing, the person filing has to make payments to the courts to pay down the balances on their unsecured accounts for several years before their discharge. Chapter 7 bankruptcy may require that someone sell off some of their assets but will then lead to a quick discharge of their qualifying unsecured debts.

To qualify for Chapter 7 bankruptcy, you first have to pass a means test. Why is an analysis of your income and finances part of the bankruptcy process?

Means testing protects creditors from those who abuse the system

Bankruptcy helps those who have more debt than they can repay. Some people need bankruptcy because they have never learned how to balance a budget. Others have done a good job of managing their household until they got divorced, got hurt in a car crash or got laid off from work.

Although most people who file for bankruptcy have legitimate financial needs, some people might abuse the system for their own benefit. They could intentionally accrue debts with no plan to pay them off or try to hide personal property that they should liquidate to repay their creditors.

Means testing helps ensure that those with the potential ability to repay their creditors do not misuse the bankruptcy system. By looking at what someone has earned over the last six months, the court can prevent those with enough income or assets to repay their debts from seeking Chapter 7 bankruptcy and depriving their creditors of their rights.

Is the means test easy to manage?

In theory, the mean test for Chapter 7 bankruptcy is straightforward. You compare your income to the median income for a household of the same size based on federal figures. You do get to adjust your household income, and there are certain deductions that can help those who at first think they earn too much actually successfully qualify.

Understanding how to calculate your adjusted income to compare to the current median can be tricky, and mistakes during this process might prevent someone who could qualify from doing so. Learning more about the means-testing process can help you make better decisions about what kind of bankruptcy to choose.

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