Using the bankruptcy means test to assess Chapter 7 eligibility

On Behalf of | Sep 25, 2023 | Bankruptcy |

When facing financial difficulties, many people in North Carolina think about filing for Chapter 7 bankruptcy as a way to obtain relief from overwhelming debt. However, before proceeding with a Chapter 7 bankruptcy case, you must determine whether you meet certain eligibility criteria.

The bankruptcy means test evaluates your financial situation to assess your eligibility for Chapter 7 bankruptcy.

The first step in the means test

The bankruptcy means test determines whether you have sufficient financial need to file for Chapter 7 bankruptcy. This test primarily applies to individuals or families whose income exceeds their state’s median income for a household of similar size. The first step involves calculating your Current Monthly Income, which includes your average income over the six months preceding your bankruptcy filing. This income calculation encompasses various sources such as wages, rental income, child support and more.

Next, you compare your CMI to the median income for a household of the same size in North Carolina. If your CMI is less than the median income, you pass the means test and are eligible to file for Chapter 7 bankruptcy without further analysis.

The second step in the means test

If your CMI exceeds the median income, you must proceed to the next phase of the means test, which evaluates your disposable income. This calculation involves deducting certain allowable expenses from your CMI to determine your disposable income. Allowable expenses typically include housing, transportation and other essential costs. Once you calculate your disposable income, you compare it to a predetermined threshold. If your disposable income falls below this threshold, you pass the means test and are eligible for Chapter 7. However, if your disposable income exceeds the threshold, you may have to file for Chapter 13 bankruptcy instead.

Failing to pass the means test may mean you have to explore alternative debt relief options. However, most people who take the test pass it without much trouble, with about 65% of all bankruptcy filers ultimately filing for Chapter 7.