One important step when considering bankruptcy is understanding if you are eligible. The means test helps determine this. It applies to Chapter 7 bankruptcy, which allows for the discharge of most debts without a repayment plan.
The means test evaluates your income and expenses to see if you qualify for this type of bankruptcy.
What is the means test?
The means test measures your financial situation. It compares your average monthly income over the past six months to the median income for a household of your size in Alabama. If your income is below the median, you pass the means test and may qualify for Chapter 7 bankruptcy. If your income is above the median, you need to complete the second part of the test.
The second part of the means test
The second part of the means test involves calculating your disposable income. This is done by subtracting certain allowed expenses from your income. These expenses include basic living costs, such as housing, food, transportation and medical care. The aim is to determine how much money you have left after covering these necessary expenses. If your disposable income is below a certain amount, you may still qualify for Chapter 7 bankruptcy. If it is higher, you may need to consider filing for Chapter 13 bankruptcy instead.
Why is the means test important?
The means test prevents people with higher incomes from filing for Chapter 7 bankruptcy when they could repay some of their debts through a Chapter 13 repayment plan. This ensures that bankruptcy relief is available to those who truly need it. Passing the means test is a key step in the bankruptcy process because it influences the type of bankruptcy you can file.
Exceptions to the means test
There are some exceptions to the means test. For example, if your debts are primarily business-related, you may not need to take the test. Additionally, disabled veterans who incurred debt while on active duty may also be exempt.
The means test ensures that those who genuinely cannot repay their debts can get relief. Understanding and completing the means test correctly is necessary for anyone considering filing for bankruptcy.