Bankruptcy provides financial relief for those struggling with debt. Businesses and lawmakers worry about the possibility of people abusing bankruptcy and defrauding their creditors.
Therefore, there are numerous restrictions imposed on different types of bankruptcy. Chapter 7 bankruptcy is often the fastest solution for overwhelming debt. Many people can complete a Chapter 7 filing in under six months.
They may not need to make any payments to their creditors, and they may be able to exempt any valuable property from the liquidation process that occurs in a Chapter 7 bankruptcy. To prevent people who have the means of paying their debts from fraudulently pursuing bankruptcy, the courts require that filers pass a means test to qualify.
What does means testing entail?
The Chapter 7 bankruptcy means test involves calculating personal or household income and comparing it to federal median income statistics. Individuals use their income over the last six months to calculate their annual income.
They can adjust that income for certain allowable expenses by deducting those costs from their gross income. The person hoping to file for bankruptcy then compares their adjusted income with the median income reported by the Department of Justice for a household of the same size in the same state.
People who have recently lost their jobs or experienced a reduction in their income may qualify for Chapter 7 bankruptcy. They may be able to discharge eligible debts, including credit card balances and medical debts, without fulfilling a repayment plan.
Working with an attorney during the means testing process can help people accurately adjust their income and determine if they qualify for a Chapter 7 bankruptcy.