If you are one of the millions of Americans who is in over your head with debt, you may wonder if you qualify for Chapter 7 bankruptcy. In Chapter 7 bankruptcy, the bankruptcy courts discharge most of your unsecured consumer debts and some secured debts.
Chapter 7 is preferable over Chapter 13 if you have little to no disposable income and if you want a fresh financial start. That said, not everyone qualifies for Chapter 7, so how can you determine if you do?
The bankruptcy means test
The bankruptcy means test is a test the bankruptcy courts use to determine if a debtor qualifies for debt forgiveness through Chapter 7 bankruptcy. The test takes into consideration your family size, expenses and income to determine if you have enough money left over at the end of the month to repay all or a portion of your debt. Though the courts designed the test to limit the number of Chapter 7 filings, most consumers easily pass it.
How it works
The bankruptcy means test has two parts, both designed to calculate how much, if any, disposable income you have left over after taking into account your basic living expenses. The first part of the means test checks to see if your annual household income falls below New York’s median income. To check this, the court will ask to see proof of income over the past six months. It will take into consideration any recent changes in income as well, such as drops in income or job loss. If your income is below the state median, you pass the test and qualify for Chapter 7.
If you are part of the 12% of debtors who do not pass the means test in the first stage, you may still qualify for Chapter 7 based on the findings of the second part of the means test. In the second phase, the bankruptcy courts calculate your disposable income. This is the income left over after any “allowable expenses.” Allowable expenses include items such as rent, groceries, clothing, day care costs, medical expenses and the like.
During this phase, you want to be as thorough as possible. Any mistakes or omissions may mean the difference between qualifying for Chapter 7 and having to apply for Chapter 13. If you can show that your disposable income is low enough — meaning, it is not sufficient to repay even a small portion of your debt each month — you may qualify for Chapter 7 bankruptcy.