People who file for Chapter 7 bankruptcy in Oklahoma City or anywhere in the USA must pass what is known as the “Chapter 7 means test”
The bankruptcy “means test” is a formula applied to determine whether your income is low enough for you to file Chapter 7 bankruptcy. It keeps filers with higher incomes from filing for Chapter 7 bankruptcy.
The bankruptcy court’s goal is to reserve Chapter 7 for those who have no means to repay their debts. It does this by deducting specific monthly expenses from your “current monthly income” (your average income over the six calendar months before you file for bankruptcy) to arrive at your monthly “disposable income.” The higher your disposable income, the more likely you won’t be allowed to use Chapter 7 bankruptcy.
The means test is two step process.
Step One: Median Income Comparison
The first step in the Chapter 7 bankruptcy means test is simple: it compares your income to the median income in your state for a family the same size as yours.
The median income for your family size may differ dramatically depending upon where you live, and a bankruptcy lawyer can tell you whether you are above or below the applicable median income.
If your income is higher than the median income, it doesn’t necessarily mean that you can’t file for Chapter 7 bankruptcy; it just triggers the second step in the test.
Step Two: Calculating Disposable Income and Unsecured Debts
The second step is a bit more complicated, and actually breaks down into separate pieces itself.
Certain allowable expenses (determined by IRS guidelines) are subtracted from your income to find your “disposable income.”
If your projected disposable income over the next five years totals less than $6,000 ($100/month), you likely “pass” and can file under Chapter 7.
If your disposable income is greater than $10,000 over the next five years, a presumption arises that you don’t really need to file for Chapter 7 bankruptcy and you may only be allowed to do so if you can demonstrate special circumstances.
In the gray area between $6,000 and $10,000, yet another calculation is often required.
This one compares your disposable income over the next five years to a percentage of your unsecured debt to determine whether any significant repayment to your creditors is possible.
If your disposable income over that five years is greater than 25 percent of your unsecured, non-priority debts, you’ll probably find yourself in the same circumstances as if you’d had more than $10,000 in disposable income.
If your disposable income over a five year period is less than 25 percent of your unsecured, non-priority debts, you will likely “pass” the means test.
What if I don’t pass the Means Test?
If you don’t pass the means test, you are limited to using Chapter 13 bankruptcy, which requires you to make monthly payments over a five-year period according to a strict budget monitored by the court. Most people who file for bankruptcy prefer Chapter 7, which requires no repayment.
Talk to a bankruptcy attorney regarding your eligibility to file bankruptcy under Chapter 7 or 13.
