Are you considering filing for Chapter 7 bankruptcy? Before doing so, make sure you pass the bankruptcy means test, which is designed to ensure that only those individuals who truly cannot pay their debts file for bankruptcy. The bankruptcy means testing determines whether or not your monthly income is too high to qualify for bankruptcy. Even if you do not pass the means test, you can still pursue filing for Chapter 13 bankruptcy and repay a portion of your debts. A qualified Las Vegas bankruptcy attorney can assist you with filing. Below, we discuss how to determine if you can pass the means test to file chapter 7.
How the bankruptcy means test works
The means test for Chapter 7 looks at your financial situation to determine if you qualify to file a bankruptcy case. The means test bankruptcy allows those who need to file for bankruptcy to file for Chapter 7. It also prevents unnecessary filings from those with other options for resolving their financial challenges.
Take the following steps to complete the means test calculation:
- First, determine what your state’s median income is. Collect your pay stubs or paid invoice statements from the past six months. Refer to the available government data to learn the median income for your state. Note that the median income allowed isn’t fixed; it varies based on the number of people in your family, accounting for all dependents. If your monthly income is less than the state median income, you qualify for Chapter 7 and do not have to pass the means test. If you didn’t pass the state median income test calculation, you could take the rest of the test to determine if you qualify.
- If you earn more than the state median income, you then need to determine what your disposable income is. Compute your current monthly income, which is your average income for the six months prior to filing. After deducting specific necessary monthly expenses from your current income, the money left over is your disposable income. If your disposable income is greater than a certain amount, you are not eligible for filing Chapter 7. The Internal Revenue Service (IRS) determines the amount of allowed disposable income to qualify. Their figures are based on local and national costs.
Use the Chapter 7 means test forms
The U.S. government provides forms for both steps to complete the bankruptcy test. Use Form 122A-1 to calculate your income. This official form prompts you to enter all required income to ensure you accurately calculate your monthly income.
Use Form 122A-2 for step 2 if your income isn’t low enough to qualify for Chapter 7 bankruptcy. This bankruptcy form allows you to claim the national expense standards established by the IRS and the housing and utilities costs permitted by the U.S. Trustee Program chart. The form has space for adding all monthly expenses, ensuring you present an accurate picture of your financial situation.
Form 122A-1Supp allows qualifying applicants to skip the means test. Military members qualify to use this form to skip the means test calculator.
If you pass the bankruptcy means test
Even if you do qualify for filing Chapter 7 bankruptcy, that doesn’t necessarily mean you should. Filing for Chapter 7 bankruptcy should only be done after considering other alternatives and speaking with a bankruptcy attorney.
There are a couple of questions to ask yourself if you’re eligible for filing Chapter 7 bankruptcy, including the following:
- Will Chapter 7 bankruptcy discharge all your debts? Filing for bankruptcy allows you to discharge debts such as credit card debt, but filing for bankruptcy doesn’t discharge debts for things like alimony, student loans, taxes, and child support.
- Will you lose too much property? Chapter 7 filers can claim exemptions but must forfeit things like work tools, vehicles, and houses that exceed the exemption limits.
- How will filing affect your financial future? Filing for bankruptcy impacts your credit score. Chapter 7 bankruptcy affects your credit for ten years, while a Chapter 13 bankruptcy only stays on your report for seven years, allowing you to rebuild your credit faster.
If you fail the means test
Individuals who do not pass the means test are limited to filing for Chapter 13 bankruptcy if they don’t want to wait. With Chapter 13, you’re required to make monthly payments over either 3 or 5 years at an amount that is strictly monitored by the court. Because Chapter 7 does not require any debt payback, most people prefer it. Nevertheless, it is essential to speak with an attorney to see how filing for Chapter 13 bankruptcy is the best way to handle certain debts, such as curing a mortgage default.
There are several other options you can consider. You can use your disposable income to pay down your debts. Sometimes, it’s possible to negotiate a payment plan with creditors that allows you to meet your financial obligations and reduce your debt load.
You may also qualify for a debt consolidation loan. You can use the loan to pay debts with higher interest rates and reduce your expenses because these loans have lower interest rates.
You can also use your disposable income to make payments over the next six months and complete the means test again. You could qualify for Chapter 7 bankruptcy in six months if you have a significant change in income.
You can also reevaluate your calculations to determine if you made a mistake. Contact our Las Vegas bankruptcy attorney today to review your means test to determine if filing Chapter 7 bankruptcy is an option.
Common errors with the means test
You might not realize you passed the means test if you made mistakes when completing your income and expense forms. Common errors include the following:
- Inaccurate tax deductions. The forms allow you to deduct monthly taxes; however, you can’t claim other payroll deductions, such as 401(k) contributions.
- Omitting family size adjustments. The forms allow you to increase your state’s median income based on the number of dependents you have. Failing to include all dependents could impact your means test.
- Social Security income. You aren’t required to claim SSI when calculating your income.
You may also have unpermitted expenses included in your forms, so it’s a good idea to discuss your situation with a bankruptcy attorney, who can help you complete an accurate means test.
What happens next?
Schedule your legal consultation now. Your bankruptcy attorney can clarify your financial options and help you identify how to resolve your debts. Working with a bankruptcy attorney ensures you make informed decisions so you can begin your journey to restoring your financial health.
Official Form 122A-1. (2019).
Official Form 122A-2. (2022).
Official Form 122A-1Supp. (2015).