Adam Law Group Blog

Breaking Down Chapter 7 Means Test

You’ve decided that you want to declare bankruptcy and that Chapter 7’s liquidation form would most benefit you.  Now what?  Now, you need to determine whether you are eligible to declare bankruptcy.  You may feel like there is no way to get out from under your debt, but bankruptcy laws may disagree.  To be eligible to file for bankruptcy under Chapter 7, a debtor must satisfy the “means test.”DebtMag

The goal of the means test is to determine whether a debtor really needs the relief afforded by Chapter 7 or whether they actually have the financial means to repay their debt (or a portion thereof) on their own.

Income Comparison

The Chapter 7 means test can involve multiple steps.  The first inquiry is whether the debtor’s current monthly income is greater or less than the average in their state for a household in their state.  That means in Florida, your monthly income will be compared to the average for households of your size in the state.  That number changes from year to year.   Your monthly income is determine by taking the average of your income from the 6 months preceding your bankruptcy filing.

If your monthly income is less than the Florida state average for households of your size, you will almost certainly be eligible to file for Chapter 7 bankruptcy.  If it exceeds the average, further analysis is required.

Additional Considerations For Means Test

For those who exceed the average monthly income for their household size, the next step is to determine whether the debtor has enough disposable income to pay off some or part of their debts.  Disposable income is the amount of money that is left after expenses are deducted from income.

Not all expenses are included in the calculation.  The bankruptcy code and cases interpreting it are very specific about what expenses can and cannot be counted.  For example, reasonable expenses to protect a debtor and their family from domestic violence are included as are expenses incurred in caring for an “elderly, chronically ill, or disabled household member.”

Net disposable income is looked at over a 5 year period and if it is either $10,000 or more or 25% of the debtors non-priority unsecured claims or $6,000, then there is a presumption that the Chapter 7 petition is an abuse of the bankruptcy system.

A debtor’s disposable income can change drastically over a five year period.  However, the petition is evaluated at the time of filing.  In re Benedetti, 372 B.R. 90, 91 (Bankr. S.D. Fla. 2007) is just one of many examples applying this principle, which generally favors the debtor.

Ineligible for Chapter 7, Now What?

Fortunately, there are often other options available for those who don’t qualify for Chapter 7 bankruptcy, most notably, a different form of a bankruptcy, like Chapter 13 bankruptcy where debts are reorganized rather than liquidated.  The Jacksonville bankruptcy attorneys at Adam Law Group can help you with the means test determine whether bankruptcy is the right strategy for you and if so, which form will have the greatest benefit to your future financial security.