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Determining Eligibility for Chapter 7 Bankruptcy: Understanding the Means Test

Bankruptcy is often the best solution to debt problems, but do you know what type of bankruptcy is right for you? For individuals as well as partnerships, corporations and other business entities, Chapter 7 bankruptcy can provide relief. Through Chapter 7, a bankruptcy trustee gathers and sells all the debtor’s nonexempt assets to pay off debts, and most of the remaining debts are discharged. However, to qualify for Chapter 7, debtors with primarily consumer debts must meet a means test, otherwise individual debtors may consider Chapter 13 and businesses may consider Chapter 11 to reorganize debts.

The bankruptcy means test is used to determine whether your disposable income is low enough to allow you to file for Chapter 7. To determine if you are eligible, you must evaluate your income and expenses:

  • Is your monthly income more than the state median? If the answer is yes, you are subject to the means test. If your income is less than the state median, you are eligible to file for Chapter 7 and you do not have to complete the rest of the means test, although you do need to meet other requirements, such as credit counseling and sufficient time between your last bankruptcy filing.
  • Do you have enough income to pay off part of your debt? The next step in determining Chapter 7 eligibility is figuring out your disposable income under the means test and completing the required forms. If you have enough income remaining after paying your allowed monthly expenses to pay off part of your unsecured debt, then you do not qualify for Chapter 7. This is determined through a complex calculation that is set forth in the bankruptcy statutes.

Determining whether you are eligible for Chapter 7 under the means test is complicated and depends on many factors, including state median income levels, the size of your household, and your expenses, including your basic necessities. An experienced Chapter 7 attorney can help you analyze your disposable assets to determine if you qualify under the means tests and if it is your best debt relief option, or whether you are better off filing for another type of bankruptcy.

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