Chapter 7 bankruptcy offers a clean slate, because it wipes out all of your dischargeable debts (credit cards, medical bills, etc.).  To be eligible for Chapter 7 discharge, you must essentially have no assets, very little income, and no ability to pay off your debts.

To determine whether you qualify, the bankruptcy courts employ a formula called a “means test,” which is designed to weed out those who have sufficient income to pay their debts via a Chapter 13 bankruptcy.    The means test compares your income and assets to your expenses, so you may qualify even if you make a significant income.

The first step in the means test is determining whether your income is more or less than the median income in your state.  If your current monthly income is less than the median income for a household of your size in your state, you automatically pass the means test.  Median income levels vary by state and household size, and each county and metropolitan region has different allowed amounts for categories of expenses: basic necessities, housing, and transportation.

If you earn more than the median, you must figure out whether you would have enough left over to repay some of your debt after subtracting  certain essential expenses (mortgage, rent, taxes, child support, etc.). The means test looks to the average amount of income you earned over the six calendar months before filing bankruptcy, and subtracts those expenses to arrive at your monthly “disposable income.” The higher your disposable income, the more likely you won’t qualify for Chapter 7.  Click Here to download a copy of Form 22a (The Means Test).

If you don’t pass the means test, you are limited to using Chapter 13 bankruptcy, which requires you to make monthly payments over a three- to five-year period according to a strict budget monitored by the court. Most people who file for bankruptcy prefer Chapter 7, which requires no repayment. However, Chapter 13 bankruptcy is still the best way to handle specific types of problems, like curing a default on a mortgage.

There are three situations when you don’t have to pass the means test in order to qualify for Chapter 7 bankruptcy.

Non Consumer Debts:  If more than 50% of your debts are non-consumer (business) debts, you are excused from the means test requirement.

Disabled Veterans: If you are a veteran with a disability rating of at least 30%, and your debts were incurred primarily while you were on active duty, you don’t have to pass the means test.

Military Reservists and the National Guard:  If you are in the military reserve or National Guard for the period they are on active duty and for 540 days thereafter, as long as they were on active duty or performing homeland defense activities for at least 90 days. Once the exclusion period ends, if the time has not passed for objections to the means test qualification in your bankruptcy case, you will have to take and pass the means test.

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