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- Chapter 7 is a liquidation of all or some of your assets to repay your debts. Chapter 7 may wipe out unsecured debts like personal loans, credit cards and medical bills. The discharge order on your debt can happen within 60 to 90 days of the meeting of creditors.
- Chapter 13 develops a debt repayment plan that spans three to five years. A portion of your debt left over after the repayment plan may be discharged.
If you’re wondering whether bankruptcy is right for you, check out this post.
Know that filing bankruptcy isn’t as simple as handing in your Monopoly property cards to the banker and calling it a night — there are fees to be paid, forms to be filled out and qualifying criteria to meet. To be eligible for Chapter 7, you’ll need to pass what’s called the “means test.” Here’s how it works.
What is the bankruptcy means test?
The means test is used to determine whether or not your Chapter 7 bankruptcy case is an “abuse” of the bankruptcy code. If there’s a “presumption of abuse” on your case, it doesn’t automatically mean you’re a bad seed filing bankruptcy to take advantage of the process. It just means you may earn enough money to repay some of your creditors, making you ineligible for Chapter 7.
The means test was in-stated by the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005. Congress enacted it to weed out filings by people who racked up a bunch of consumer debt only to file Chapter 7 and avoid the repercussions. In addition to tightening up the bankruptcy code with the means test, the BAPCPA began requiring a bankruptcy pre-filing course.
There are two parts to the means test. The preliminary part is to see if your family’s gross income is above or below the median income for the household size in your state.
“We look at your last six months of income,” Shawn Yesner, a bankruptcy lawyer based in Tampa, Fla., told MagnifyMoney. “We then annualize that number. Sometimes it’s as simple as multiplying by two. Sometimes it’s a little more difficult.”
For instance, if you’ve only worked four of the last six months or your income fluctuates, the process could instead be seeing how much you earned per pay period so far or finding the average income and then calculating that out to 12 months. If you’re self-employed or a 1099 contractor, your profits and losses may be reviewed.
If your gross household income is below the median household income: You qualify for Chapter 7 without doing anything else.
If your gross household income is above the median household income: You have to complete the Chapter 7 Means Test Calculation form as well. This test subtracts your monthly income by various expenses to determine if you have enough disposable income left over to make debt payments under Chapter 13.
There are exceptions to the rule, however: people in certain military or homeland defense jobs and those who have debt that’s not primarily consumer debt may be exempt from the test. We’ll talk about the form exempt individuals need to fill out below.
What happens if you pass the means test?
If you pass the test, you move on with the bankruptcy process, assuming your other paperwork has been filed appropriately.
The bankruptcy process from here on can vary from person to person. Generally speaking, you and your attorney (if you hire one) will go to a meeting of creditors. You take the post-filing money management course as required.
The discharge of your debt can happen as soon as 60 to 90 days after the meeting of creditors. Chapter 7 typically can stay on your credit report for up to 10 years.
What happens if you do not pass the means test?
If you don’t pass the means test, your case may be presumed abuse of Chapter 7 and dismissed or converted to another form of bankruptcy.
Be warned: The means test is chock-full of nuance. “There’s an art to completing the means test,” said Yesner. According to Yesner, there’s confusion by both bankruptcy attorneys and judges as to what the test covers. Not all trustees or attorneys agree on how it should be calculated and different courts have different interpretations.
If you don’t pass the initial calculation, you can argue that special circumstances reduce your income or increase your expenses — for example, a medical condition or military deployment could be reasons to rebut the presumption of abuse. An attorney can help you plead your case.
If your Chapter 7 is converted to a Chapter 13, the general process is relatively similar to Chapter 7: You have a meeting of creditors scheduled after filing. However, the main difference is that Chapter 13 includes a repayment plan and confirmation hearing. You make payments toward the plan for the designated term. Remaining unsecured debts after the plan may be discharged.
Chapter 13 typically stays on your credit for up to seven years.
5 steps to taking the bankruptcy means test
Step 1: Gather your documents and hire an attorney.
The first step is pulling together your financial documents. The means test forms are available online with instructions. We’ll talk about the forms you need below — but you should know that doing this process on your own isn’t recommended.
The official term for filing without an attorney is called filing pro se. According to the Uscourts.gov, “seeking the advice of a qualified attorney is strongly recommended because bankruptcy has long-term financial and legal outcomes.”
When you hire an attorney, you send them your financial documents. “The documents needed to complete the filing are the same ones that you would take to your CPA for your tax return,” said Yesner. According to Yesner, a bankruptcy attorney can typically tell upfront if the means test will result in a Chapter 7 or Chapter 13.
Not sure if you can afford to hire an attorney? There are options for people who have limited funds. You may be able to get free or affordable legal advice through the American Bar Association’s Legal Help website or the Legal Services Corporation.
Step 2. Compare your income to the median income for your state.
The first step of the actual documentation is Form 122A-1: Chapter 7 Statement of Your Current Monthly Income. Here is where you compare your income to the state median income.
The median household income data for this form can be retrieved from the Census Bureau. However, the Department of Justice keeps an updated table of median family income by state on its website. If your household income is below the median for the state, your case is not presumed an abuse. You can skip down to Step 5.
As mentioned above, there are situations where you may be exempt from completing this first form in its entirety. If you are in certain military or homeland defense positions, you may be exempt. If your debt is not primarily consumer debt, you may also be exempt. Consumer debt is considered debt that you and your family got into voluntarily.
In the exempt scenario, you fill out just Part 3 of Form 122A, the signature portion only, and you also complete Form 122A-1Supp: Statement of Exemption from Presumption of Abuse Under § 707(b)(2) instead.
Step 3. Fill out the allowable expenses, if necessary.
If your household gross income is above the median for the state, you need to do Form 122A-2: Chapter 7 Means Test Calculation.
The purpose of this document is to calculate your disposable income. Disposable income is cash that you have available to repay debt after you deduct expenses from your monthly income.
To fill out Form 122A-2, you do not just jot down your actual expenses in all of the blank spaces. The IRS National and Local Standards data should be used to write down the allowable costs for items like food, clothing, housing, utilities, transportation, and other expenses. You can find the standards for various line items here.
According to Yesner, for some expenditures like housing, your attorney may be able to argue for tacking on additional payments on top of what the IRS allows. You need to show receipts and other proof. There’s also room in the form to fill in expenses for your taxes, life insurance premiums, education, child care, court-ordered payments, and more.
Step 4. Calculate your disposable income.
At the bottom of Form 122A-2, there’s a space to do the math. You subtract your monthly income by the expenses to arrive at your monthly disposable income. Then, you multiply your monthly disposable income by 60 months to see what extra cash you’ll have available over the next five years.
Currently, if the result is less than $7,700, there’s no presumption of abuse. If the disposable income is more than $12,850, there is a presumption of abuse — however, you have space on the form to explain any special circumstances that you believe qualify you for Chapter 7.
If your disposable income is between $7,700 and $12,850, you have to determine if the cash is enough to pay at least 25% of your nonpriority unsecured debt. The conditions for what is or isn’t abuse can change, so be sure to check the most recent form edition for up-to-date requirements.
Step 5. File the paperwork.
The testing paperwork is one of the many documents that’s included in your bankruptcy filing. Your attorney will help you get all the paperwork together; if, however, you plan to file on your own, you can learn about each of the documents you will need to file and when here. You’ll also need to pay fees — there’s a $245 filing fee, $75 miscellaneous administrative fee and $15 trustee surcharge.
Can you do the means test yourself?
Technically, you can file the means test yourself. But it won’t be easy, and it’s not advised. The first part of the means test is straightforward — your household income is above the median or it’s not. However, the second part of the test has a lot of gray areas.
The means test determines what form of bankruptcy you can file. If you get it wrong, you could be forced to file a form of bankruptcy that you didn’t intend to do. You could always do it on your own at first purely for educational purposes to get a sense of where you stand. For the official filing, it’s a good idea to call in the professionals.