Is a Means Test Necessary for Chapter 13 Bankruptcy?

Yes, the chapter 13 bankruptcy means test, or simply bankruptcy means test, is necessary to file bankruptcy cases. Personal bankruptcy is a legal process which allows individuals to either repay or expunge their debts. However, whether they can file chapter 13 or will be required to file chapter 7 depends on this means test.

Chapter 13 Allows People to Repay Debts in 36 to 60 Months

Chapter 13, also called wage earner’s bankruptcy, is for individuals with regular income and who qualify to repay the money they owe. The money is typically paid to a bankruptcy trustee who then distributes the money to creditors. In addition, people can afford legal protection while they repay their debts through an automatic stay. The stay prohibits creditors from initiating or continuing debt collection attempts such as wage garnishments, foreclosures and lawsuits.

The Bankruptcy Means Test Determines Whether Individuals Have Enough Income to Qualify

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ensures that people who can file chapter 13 don’t choose to file chapter 7 instead. In other words, before 2005 people could choose either bankruptcy option despite how much money they had.

The Means Test Formula Income People’s Debt vs. State Median Income

Individuals must add up their income—after they have paid their monthly debts. Typically, this income should be at least income before they plan to file for bankruptcy. Then they must compare their income to their state’s median income for their particular household. In other words, if they have a household size of 4 people, they must find the state’s median income for the same size household. People then subtract the two incomes. If people fail the means test, they are eligible for chapter 13. This means individuals have enough disposable income to repay their debts. However, if they pass the means test, they qualify for chapter 7.

Chapter 7 Doesn’t Allow For People to Eliminate Their Debts

Unlike chapter 13, people aren’t required to repay debts. In fact, their unsecured debts are automatically discharged when the bankruptcy cases are confirmed. However, for homeowners looking to protect their homes against foreclosure chapter 7 won’t offer them the help they need. Although chapter 7 comes with an automatic stay, it only protects people against wage garnishments and lawsuits.

Seek Legal Help

Bankruptcy lawyers will help people wanting to file bankruptcy. In addition, they will assist people in determining if they pass the means test.