Chapter 7 allows individuals to essentially walk away from their debt, without repercussion. The purpose is to give individuals that qualify a “fresh start.” In 2005, the United States Bankruptcy Court revamped their criteria for determining whether an individual was “qualified” to file for relief under Chapter 7 of the US Bankruptcy Code. The hope was to curtail the number of people eligible for filing under Chapter 7.
The “means test” was developed as a way to initially screen out individuals who made too much money, and therefore should not be permitted, in theory, to have their debt forgiven. The means test compares the petitioner’s income and “allowable expenses” against the average income and expenses for a person, with the same size household, in the petitioner’s home state. The test is comprised of two parts.
The first part of the means test determines whether the petitioner’s income falls below his/her state’s median income. One’s income is based upon his or her average income for the past six (6) months. If the petitioner’s income falls below the state median income for his or her household size, then the petitioner qualifies for filing a chapter 7 petition. No further determination is necessary.
If, however, the petitioner’s income is greater than the median income for his or her state, then the second part of the means test is applied. This section takes into consideration one’s expenses for the prior six (6) months. Specifically, the means test looks at one’s rent or mortgage payments, food costs, utility costs, clothing, automobile, medical bills, support obligations, education costs and student loans. The means test compares the petitioner’s expenses against the national standards, or in some cases the local standards, for these expenses. The goal of this second step is to determine whether or not an individual has disposable income after paying his or her “allowable expenses.” If one has no disposable income after paying these expenses, or if the disposable income is low enough, that individual will be deemed to have passed the second part of the means test and can proceed with filing a chapter 7 petition.
If one does not “pass” the means test, that individual is precluded from filing for bankruptcy under Chapter 7. There may, however, be other options available under the Bankruptcy Code, such as filing under Chapter 13. It is best to consult with a local bankruptcy attorney to determine your best options.
Attorney Catherine Becker Good, Esq.
Divorce and Mediation Lawyer
Legal Solutions Law Group
858 Washington St Suite 103
Dedham, Massachusetts 02026