What is a Means Test Under Chapter 7 Bankruptcy?

In the recent years, bankruptcy has become the only way out for many people suffering unbearable debts. According to the US law, a business, partnership, a corporation or an individual like you and me, can seek relief from debt under Chapter 7 of the bankruptcy law.

Last year on October 17, 2005, a new bankruptcy law was passed and a means test was introduced. It determines whether you are eligible or not to file under Chapter 7. The point behind the means test is to determine whether you have enough money left to pay back some of the money you owe to your creditors or not, after all your allowed living expenses are taken in to account.
It is calculated by subtracting an IRS allowed living expenses from your monthly income.

If your income after the calculation shows to be lower or equal to the median income of the state you live in, you will most probably be allowed to file under Chapter 7.

However, if your income happens to be larger then median income of the state you live in then your average income for the past six months will be taken in the consideration, or might be forced to file under Chapter 13 of the bankruptcy law.

Some of the expenses taken in the consideration are:

1. Utilities

2. Food

3. Clothing

4. Gas and transportation bills

5.Mortgage loan

6. Car loan

7. Child support

8. Taxes

If on the other hand after subtracting all of these expenses, you have at least $6000 left over to pay back to your creditors (the unsecured ones) in the next 5 years you will be forced to file for Chapter 13 instead.

Also under the 2005 bankruptcy law, you will need to file all your overdue tax returns if you want to apply for Chapter 7.

In case that during the 180 days of proceedings your application happens to be dismissed because of the willful failure on your side to comply with the court orders you will be denied filing for bankruptcy under Chapter 7.

Also in case that you as an debtor have dismissed the previous case of your own free will, after your creditors have required relief through the bankruptcy court, your petition will also be denied.

2005 bankruptcy law has brought along one more important change, as an individual you are now obliged to obtain credit counseling from a certified counselor before you can file for Chapter 7 bankruptcy.

The purpose of credit counseling is to educate you and help you reorganize your financial affairs. If you are serious about filing for Chapter 7, you have to provide the court with debt management plan you have developed during credit counseling, within 180 days prior to filing for bankruptcy.