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The Bankruptcy Means Test

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The Bankruptcy Means Test

Are you considering filing a Chapter 7 bankruptcy? If so, it’s important for you to know that not all debtors qualify for a Chapter 7. Why is this? Because Chapter 7 bankruptcy is reserved for debtors with a very low income. If you have a substantial income and at least some disposable income to repay your debts, you may not qualify for a Chapter 7 bankruptcy and may have to file a Chapter 13 instead.

In order to determine if you qualify for a Chapter 7 bankruptcy, you will need to take what’s called the bankruptcy “means” test. This test takes a look at your monthly income and household size. If your income falls below the median income for a household of your size in California, you pass the “means” test. You’re done and you can file a Chapter 7 bankruptcy.

If your income exceeds the threshold, you may have to file a Chapter 13 bankruptcy, which allows debtors to pay off a portion of their debts over a 3 to 5-year period. Ultimately, your eligibility for a Chapter 7 depends on your monthly income, your debts, and if you have any disposable income left over to repay your debts. A bankruptcy lawyer from our firm can help you determine if you qualify for Chapter 7 if you have a high income.

Do I Have to Be Penniless to Pass?

To pass the bankruptcy means test, you do not have to be broke or penniless to qualify for Chapter 7. As a matter of fact, a debtor can earn a significant monthly income and still pass the bankruptcy means test if they have a lot of financial obligations, such as a car payment, a mortgage, taxes, and other hefty debts.

The purpose of the bankruptcy means test is to reserve Chapter 7 bankruptcy for debtors who truly cannot afford to pay off their debts. If you do not pass the Chapter 7 means test, you will have to file a Chapter 13 bankruptcy instead. With a Chapter 13, you are placed on a strict, court-monitored repayment plan that lasts 3 to 5 years depending on the facts of your case.

To learn more about Chapters 7 and 13 bankruptcies and which one is right for you, contact Arnold Law Group, APC to request a case evaluation.