Filing for chapter 7 bankruptcy can help you deal with an overwhelming debt problem, but you must pass a means test to qualify for this type of case. The means test is designed to determine if you have enough disposable income to pay your debts. If you do, you won't be able to file for chapter 7 and will have to settle for chapter 13. However, the bankruptcy court does allow debtors to deduct a number of expenses from their incomes, which may make it easier to qualify for chapter 7 bankruptcy.
How the Means Test is Conducted
There are two ways the means test is done. The first way is to take the person's income over the prior six months, annualize it, and then compare that figure to the median income for the same-sized households in the state where the person lives.
For example, the median income in Michigan is currently $43,677 for a one-person household. Someone who made $3,000 per month in the previous six months would be eligible for a chapter 7 bankruptcy because the person's annual income would be calculated at $36,000 per year, which is less than the median for that state.
If the person's income lands above the median, then the court enacts the second option of deducting expenses from the amount and seeing what's left over. If there isn't any disposable income after the deductions, then the person will be allowed to file for chapter 7.
Some of the expenses the courts use are standardized ones based on local and national standards, which is calculated by the IRS. However, you can still deduct certain expenses from leftover income that may reduce it enough so you pass the means test. These expenses include:
Exceptions to the Means Test
Not everyone is required to pass the means test to qualify for a chapter 7 bankruptcy. There are three exceptions to the rule:
Passing the chapter 7 bankruptcy means test may be challenging if you have a high income and your expenses are high enough. There may be other options available for passing the test, and it's best to consult with a bankruptcy attorney, like Wiesner & Frackowiak, LC, for assistance.
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