Breaking down the Chapter 7 test

On Behalf of | May 5, 2020 | Bankruptcy |

If continuous struggles with debt have you contemplating filing for personal bankruptcy, then a decision almost as important as filing itself is what chapter you choose to file under. For many Americans, Chapter 7 is the most popular form of bankruptcy due to the promise it offers of discharging certain debts.

Many people from Gastonia come to us here at The Law Office of Geoffrey A. Planer assuming that Chapter 7 bankruptcy is also an option for them. If you share the same assumption, you should know that there are requirements for filing under this chapter.

The Chapter 7 means test

It is due to the very fact that a Chapter 7 bankruptcy offers the potential of discharged debts that federal authorities do not want filers to abuse the privileges it affords. Thus, the Chapter 7 means test exists to ensure that your current debt situation indeed merits a Chapter 7 filing. You only become subject to the means test, however, if your current monthly income is above that of your particular demographic in the state. If it is not, then you automatically qualify.

If your income is above the state average, then according to the website for the Administrative Office of the U.S. Courts, the bankruptcy court projects your current monthly income out over a period of five years. If that projection exceeds either 25% of your cumulative non-priority unsecured debts (provided that amount is over $7,700) or $12,850, then you fail to qualify to file under Chapter 7.

What if you fail the means test? 

This does not mean that personal bankruptcy is no longer an option for you. Rather, the court may instead ask you to file a wage-earner bankruptcy (Chapter 13), which mandates the repayment of debts over 3-5 years.

You can find more information on preparing for personal bankruptcy throughout our site.