The Bankruptcy Means Test – What It Is and How It Impacts Filing
By Brenner Spiller & Archer, LLP | April 9, 2019
For the most part, anyone can file for bankruptcy. And when given a choice, many debtors prefer filing Chapter 7 bankruptcy because it discharges most debt, giving them a new and fresh start. However, in order to qualify, a debtor must first meet an income limitation by way of a means test.
What is the Means Test in Bankruptcy?
The bankruptcy means test is the way to determine eligibility for debt forgiveness through Chapter 7 bankruptcy. It clarifies whether a debtor is an appropriate fit for Chapter 7 bankruptcy or if they are limited to Chapter 13. It considers income, expenses and family size in order to establish whether or not there is enough disposable income to repay the debts. It is the earliest and most important step in filing for bankruptcy.
Why is There a Means Test?
The purpose of the current bankruptcy law is to weed out filers who can afford to repay some of their debt. It was designed to restrict the number of debtors who can get their debts forgiven through a Chapter 7 bankruptcy, and limit the use of Chapter 7 bankruptcy to those who can’t pay their debts.
What Do You Need in Order To Pass It?
The test is loosely based upon family size and income during the six months prior to filing a bankruptcy case. Specific monthly expenses are deducted from the average income over the months before filing to arrive at the monthly “disposable income”. The type of deductions are very important in calculating the means test. For a family size of one the income limit is $68,349. Family size of 4 raises the limit to $125,465. The limits are subject to increase over time.
What If You Pass? Or Fail?
Merely passing the means test doesn’t automatically qualify you to file for Chapter 7 bankruptcy, and just because you qualify under the means test doesn’t necessarily mean you should file.
Conversely, if you fail the means test, just because you are over the limits, it doesn’t necessarily mean you do not qualify to file a bankruptcy under chapter 7 or chapter 13.
An experienced bankruptcy attorney can uncover and avoid common errors that often lead to failing the means test. And in some cases they can point out legal ways of increasing expenses or decreasing income so that you can pass the means test.
In order to be eligible for debt forgiveness through Chapter 7 bankruptcy, one must pass the means test. Passing it gives a green light to consider filing Chapter 7 bankruptcy, which will forgive most unsecured debts — like credit card debt and medical bills. Those who don’t qualify for Chapter 7 can choose to reorganize and prioritize their debts and pay them off through Chapter 13 bankruptcy. Or if they can wait (and their financial situation is likely to change) the test can be retaken after six months.
Before or after taking your test (whether pass or fail), take time to talk with a bankruptcy attorney to figure out which debt relief solution is best for your situation and goals. Brenner Spiller & Archer, LLP can help get you on a path to rebuild your financial life.
This article should not be taken as legal advice. If you’re considering bankruptcy or any other legal debt relief option, you need to consult an attorney for guidance. If you’re in New Jersey and seeking legal assistance, we can help you.
Brenner Spiller & Archer, LLP is a New Jersey law firm that is dedicated to helping families find relief from the burden of debt and other financial woes. For more than 35 years, our bankruptcy lawyers have provided effective guidance on all debt relief matters to clients throughout Central and South Jersey.