How to Qualify for Chapter 7 Bankruptcy Under the Means Test

If you're struggling with debt and considering bankruptcy, Chapter 7 may be a solution to help you discharge unsecured debts, such as credit card balances and medical bills. However, before you can file for Chapter 7 bankruptcy, you must pass the means test, which evaluates your income and expenses to determine if you qualify.

As a bankruptcy lawyer at the Law Office of Victor Druziako, P.C. in Vineland, New Jersey, I understand how overwhelming this process can be. The means test is an essential part of qualifying for Chapter 7, and we can guide you through the necessary steps to assess your eligibility.

At our firm, we have extensive experience helping individuals manage the complicated bankruptcy process, making sure that they understand each stage and their legal options. If you’re considering Chapter 7, it’s important to understand the means test requirements and what factors influence whether you qualify. Read on to learn more about how the means test works and the steps to take to pass it.

What Is the Means Test for Chapter 7 Bankruptcy?

The means test is a crucial component in determining eligibility for Chapter 7 bankruptcy. This test compares your household income to the median income for your state and household size.

If your income is below the state median, you generally qualify for Chapter 7 bankruptcy. If it exceeds the median, further calculations are required to assess your disposable income and determine whether you can afford to repay some of your debt through a Chapter 13 repayment plan.

The purpose of the means test is to make sure that individuals who can afford to repay their debts through a Chapter 13 plan do so, while those who truly can't make payments are eligible for Chapter 7. 

This helps prevent abuse of the bankruptcy system and makes sure that Chapter 7 relief is reserved for those who need it most. Understanding how your income, expenses, and household size factor into the means test is key to knowing whether you qualify.

How Your Household Income Affects the Means Test

One of the first factors considered in the means test is your household income. The income threshold is based on the median income for your state, adjusted for your household size. If your income is below this median, you'll likely qualify for Chapter 7 bankruptcy without further calculations.

However, if your income exceeds the median, the means test will require you to calculate your monthly disposable income to see if you can afford a Chapter 13 repayment plan.

Disposable income is the amount of money left over after deducting allowable living expenses from your monthly income. These expenses can include housing, utilities, food, transportation, and insurance premiums.

Some important factors to keep in mind include:

• State median income – Your eligibility for Chapter 7 will depend on whether your income is above or below the median for your state and household size.

• Household size – A larger household size generally increases the median income threshold, meaning you may have a better chance of qualifying for Chapter 7 if you have dependents.

• Recent changes in income – If you’ve experienced a drop in income due to job loss, illness, or another hardship, it could affect your eligibility, so it’s important to update your income details accurately.

Once your income and expenses are accounted for, you’ll have a clearer picture of whether you qualify for Chapter 7 or if you may need to pursue Chapter 13 bankruptcy instead.

How to Calculate Your Disposable Income

If your income exceeds the state median, the next step in the means test involves calculating your disposable income. Disposable income is the portion of your income that remains after you pay for necessary living expenses. The goal of this calculation is to determine whether you have enough disposable income to make payments under a Chapter 13 repayment plan.

The bankruptcy code outlines specific categories of allowable expenses, including rent or mortgage payments, utilities, transportation costs, and healthcare. These expenses are subtracted from your monthly income to determine how much money is left over.

If you have a significant amount of disposable income, you may not qualify for Chapter 7, and a Chapter 13 plan may be necessary.

Some essential factors to consider in calculating disposable income include:

• Mortgage or rent – The cost of housing is one of the largest monthly expenses for most individuals and is an important factor in calculating disposable income.

• Transportation – Your vehicle payments, gas, insurance, and repairs are essential expenses that can help reduce your disposable income.

• Health insurance and medical expenses – If you have significant medical costs, they can be deducted as allowable expenses when calculating your disposable income.

• Child and dependent care – Costs related to the care of children or dependents can be considered in the means test, allowing for more flexibility in your disposable income calculation.

By properly accounting for these expenses, you can determine whether you have enough disposable income to qualify for Chapter 7. If not, Chapter 13 may be a better option for managing your debts over time.

What Happens If You Fail the Means Test?

If you fail the means test, it means that your income is deemed too high to qualify for Chapter 7 bankruptcy. In this case, you’ll likely be directed to Chapter 13 bankruptcy, which involves a repayment plan for a portion of your debt.

Chapter 13 allows you to keep your property while making payments over a period of three to five years, depending on your income and the amount of debt you owe.

While failing the means test may seem like a setback, Chapter 13 bankruptcy can still offer valuable relief by consolidating your debts into one manageable monthly payment. Additionally, Chapter 13 may provide more protection from creditors, preventing foreclosure and stopping wage garnishments.

Understanding the nuances of both Chapter 7 and Chapter 13 is important, especially if you fail the means test. In some cases, a bankruptcy lawyer can help identify any deductions or adjustments that could improve your chances of passing the test.

Can You Adjust Your Income or Expenses to Qualify?

In some cases, individuals may adjust their expenses to meet the qualifications for Chapter 7 bankruptcy. While it’s important to be honest in your calculations, certain expenses may be higher than they seem and could be adjusted or accounted for in a way that impacts your means test outcome.

For example, if you have substantial medical costs or significant child care expenses, these can be factored into your monthly expenses, potentially lowering your disposable income. A bankruptcy lawyer can help you review your budget and determine which expenses can be legitimately included to improve your chances of qualifying for Chapter 7.

It’s also possible to make changes to your household’s income temporarily, such as reducing overtime hours or adjusting non-essential spending, though these steps must be carefully considered to avoid legal complications.

How to Manage the Means Test Process

The means test process can seem overwhelming, but understanding the steps involved is crucial to determining whether you qualify for Chapter 7 bankruptcy. First, you’ll need to gather documentation regarding your income, household size, and monthly expenses. This will include pay stubs, tax returns, and proof of necessary expenses like housing, utilities, and transportation.

Once you have all your financial details, the next step is calculating your current income and comparing it to the state median. If your income exceeds the median, you'll then need to account for allowable deductions to determine your disposable income. These calculations are essential to determining if you’re eligible for Chapter 7.

A bankruptcy lawyer can help clarify which expenses should be considered and make sure that your numbers are accurate. Additionally, a bankruptcy lawyer can guide you through the process, making sure you're taking advantage of all the exemptions and deductions available to you.

Some common areas of adjustment during the means test include:

• Allowable expenses – Certain necessary expenses, such as medical costs, mortgage payments, and utilities, can be deducted from your monthly income.

• Income variations – If your income fluctuates, it’s important to carefully document this and use an accurate monthly average for the means test.

• State median comparison – The median income for your state and household size plays a key role in determining whether you qualify, so it's important to know where you stand relative to this benchmark.

With a clear understanding of the means test process and an accurate assessment of your financial situation, you can make informed decisions about your bankruptcy filing. A bankruptcy lawyer will be crucial in helping you manage this process smoothly and making sure that you meet all legal requirements.

Call Us Today

If you’re considering bankruptcy and are unsure whether you qualify for Chapter 7 under the means test, don’t hesitate to reach out to me at the Law Office of Victor Druziako, P.C. As an experienced New Jersey bankruptcy lawyer, I can help guide you through the means test process. Contact us today to schedule a consultation, and let us help you get on the path toward financial freedom.