When you’ve been dealing with significant debt burdens for years on end, you may eventually decide to get a fresh start, by filing for Chapter 7 bankruptcy. This form of bankruptcy allows you to “discharge” most forms of unsecured debt, including mounting credit card balances and bills from major medical expenses. Because of this, Chapter 7 is often referred to as “debt forgiveness.”
However, in order to even qualify for Chapter 7, you will need to prove that you have little to no disposable income that could be used to pay down debt. This is accomplished through the “means test,” which is the legal standard used to assess your eligibility for debt forgiveness.
How Does the Means Test Work?
The means test can be confusing for those unfamiliar with the bankruptcy world, as it requires filling out multiple forms and performing complex financial calculations. But the basic concept of the bankruptcy means test is actually quite simple: You just have to demonstrate to the bankruptcy court that your income does not adequately cover your expenses. Thus, the means test can be broken into two major steps.
Step 1 of the Means Test
During the first step, you’ll be asked to verify that your household income falls below the median income in your state. To do that, you’ll need to have a clear record of your household income over the last 6 months, and then fill out Form 122A-1, which is an official statement of your monthly income. If you pass the means test at this stage, then you may already qualify for Chapter 7 bankruptcy.
Step 2 of the Means Test
All hope is not lost if you fail the first stage, though. In the second step, you can gather documentation about your total household expenses for the last 6 months, to show that your disposable income is too limited for a debt repayment plan under Chapter 13. This process can be fairly time-intensive and require assistance from a lawyer, as there is a strict set of criteria on what you can include as a “household expense.”
What Happens if I Fail the Means Test?
Filers who don’t pass the means test are often confined to Chapter 13 bankruptcy, but that isn’t always the case! If you’re able to hold off on bankruptcy and believe that your situation will worsen in the near future, you could re-take the means test in another 6 months.
Additionally, while filing for Chapter 7 can be a freeing experience, there are many situations in which Chapter 13 could be a better fit. Although you will still have to pay off your debts under Chapter 13, you will also benefit from a comprehensive “wage earner plan” that can protect you from foreclosure or repossession.
At Lam Law Firm, our Myrtle Beach bankruptcy lawyer can take a look at your unique situation and help you find safer financial shores. Contact us at (843) 695-7700 today for a free consultation!