When one is looking into filing for bankruptcy, the term, “means test” will undoubtedly come up, frequently. However, many of the articles on the web often skim past what the means test is and why it matters.
What is the means test?
Simply put, the means test is what determines whether one can file for Chapter 7 bankruptcy. Those who fail this test, or who do not want to forfeit certain assets, like antique cars, can choose to file Chapter 13 bankruptcy, which means debts will be restructured, not eliminated.
One’s income and expense information is filed onto the means test forms (i.e., the 122A Forms or the 122C Forms). This includes current monthly income, family size, and expenses. This calculation is used to figure out whether one has enough income to pay off debts. While this may sound scary, the majority of people filing for bankruptcy pass the test.
The First Test – Income
First, the test checks whether the filer’s household income is below North Carolina’s median income, based on Census data. This is done by documenting the last six months of income, with adjustments for significant changes that have already happened, like getting a new job, or will happen, like a layoff or furlough. If below the median income, the filer passes.
The Second Test – Expenses
If one makes over the median income, then expenses will be calculated. Like income, this is done through documenting the last six months of expenses. These allowable expenses are based on the IRS, but they include medical costs, clothing, groceries, and rent.
The difference between one’s income and these allowable expenses is classified as disposable income, which is available to pay off debt. And, if this disposable income is still low enough, one passes the second part of the test and can file Chapter 7 bankruptcy.
Calculating allowable expenses can easily become complicated, but it is extremely important. Mistakes can actually result in one’s case being dismissed.
As one can see, Chapter 7 bankruptcy is labor and math intensive. This is why bankruptcy courts recommend that filers consult with a bankruptcy attorney.
