The bankruptcy means test and what it means for you

On Behalf of | Aug 10, 2022 | Bankruptcy |

When you’re dealing with large debts or are struggling to make ends meet, one of the options you might start looking into is bankruptcy. Bankruptcy gives you an excellent way to resolve unsecured debts or renegotiate the terms of secured debts, but before you can get one, you need to pass the means test.

The means test is used for both of the most common types of consumer bankruptcy, Chapter 7 and 13. With either means test, your income will be compared to the median for the state. You’ll be asked about the average monthly income you received during the last six months. Some of the details you’ll need include:

  • Information about your tips, bonuses, salary, wages and other income.
  • Alimony deposits or payments.
  • Pension benefits.
  • Unemployment benefits
  • Self-employment income.
  • Investment income, royalties and interest.

After you figure out the monthly income you expect, you need to multiple it by 12 to get your annual income. Comparing this number to the median income will tell you if you are at, below or above it.

If you are at or below the median income, then you may want to pursue a Chapter 7 bankruptcy, which will help get unsecured debts discharged. If you are above it, the other option is Chapter 13 bankruptcy. There are income caps on Chapter 13 bankruptcy, but most people who don’t qualify for Chapter 7 bankruptcy will be able to use Chapter 13 instead.

You’ll also need to calculate your eligible expenses and determine if you could pay off at least 25% of the unsecured portion within the next five years. If not, then you’ll pass the second part of the means test.

Bankruptcy can be a solution for some people with debt

Bankruptcy isn’t the perfect solution for everyone who is in debt, but it can be used by many people to get the help they need. It is a good option for those who have a low income or for those who can repay what they owe if the debts are rearranged in some way. There are different options to try, which is why it’s a good idea to look into bankruptcy when financial trouble doesn’t seem to have an end.