What is the bankruptcy means test?

As troubled economic times cascade across the nation, many debtors are considering their options for resolving their financial woes. One option may be Chapter 7 bankruptcy. In addition to looking at whether it is the right option for you in your situation, you will also need to consider whether you pass the bankruptcy means test.

What is the bankruptcy means test?

It is an objective way to determine if you, a debtor, qualify for Chapter 7 bankruptcy. In the past, bankruptcy courts had a lot of discretion to make that decision on their own. However, the Bankruptcy Protection Act of 2005 was passed by Congress to address standards of bankruptcy eligibility that some felt were inconsistent and too lenient.

Who can bypass it?

Because of that, prospective Chapter 7 filers have to pass the means test in most cases. You can bypass it if who are a disabled veteran and you incurred over half the debt during service for homeland defense or while on active duty. You must also have a disability rating of 30 percent or higher. Another situation that bypasses the means test is if the debts were incurred primarily via operating a business.

What is involved?

For most other individuals, the means test will be necessary. It will look at your average income for the six months before you file. It will then compare that to the median family income of your state.

Even if you seem eligible based on that comparison, a bankruptcy trustee may ask the bankruptcy court to convert your Chapter 7 into Chapter 13 instead if they feel you have enough income to pay your creditors. That is a key consideration for whether or not you're eligible for Chapter 7. If you have enough income after allowable expenses to make repayments under Chapter 13, you'll be put into that instead. You may want to consider what you can reasonably anticipate your eligibility will be.

Source: FindLaw, "The Bankruptcy Means Test," accessed June 03, 2015