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Explaining the Chapter 7 means test

A common misconception amongst many in Greensburg may be that bankruptcy is simply a tool that people can rely on to avoid having to answer for having been irresponsible with their money. However, simply filing for bankruptcy does not mean that one does not have to repay his or her debts. Chapter 7 cases are often labeled as those that allow debtors to be forgiven of their debts, yet that is not entirely accurate. Many of one’s personal assets may be liquidated in order to repay creditors in a Chapter 7. Yet that is only if one is eligible to file at all.

The U.S. Bankruptcy Code has created requirements that keep people from abusing the protection that Chapter 7 offers. While information shared by the U.S Bankruptcy Institute shows that over 475,000 Chapter cases were filed in 2016, that does not mean that qualifying to file is a slam dunk. One must first pass the Chapter 7 means test.

The first element of the means test is comparing one’s current monthly income to that of comparable households in his or her state. If it is less, then he or she qualifies for a Chapter 7. If it is more, one may still qualify, but only after considering other factors.

According to the website for the United States Courts, one fails the Chapter 7 means test if his or her monthly income (projected over five years) is more than 25 percent or $12,850 than his or her non-priority secured debt. Provided he or she can offer a sufficient explanation as to why special circumstances should be applied to his or her case, the bankruptcy filing will be converted to a Chapter 13, which offers similar protection from creditors but requires that a debtor repay debts over 3-5 years. 

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