The Means Test Demystified: A Guide to Chapter 7 Bankruptcy Eligibility

Did you know filing for Chapter 7 bankruptcy in the United States requires you to pass the means test? The means test is critical to the bankruptcy process, determining whether you’re eligible to file for Chapter 7 bankruptcy. 

If you’re considering bankruptcy in Louisville, KY, you’ll need to pass the means test to discharge your debts successfully. 

In this blog post, I will explain everything you need to know about the means test for Chapter 7 bankruptcy, including what it is, how it works, and why it matters. 

So, let’s get started!

Mean Test: How to Complete

The means test is crucial to Louisville, KY’s Chapter 7 bankruptcy process. It determines your eligibility for Chapter 7 bankruptcy by assessing your income and expenses. 

Completing the means test accurately is essential to ensure a successful outcome for your bankruptcy filing.

However, initially, you must understand the means test’s purpose. The means test aims to prevent higher-income individuals from abusing the bankruptcy system by filing for Chapter 7 bankruptcy when they could repay their debts through a repayment plan. 

If your income is below the state median, you’ll likely pass the means test automatically. However, if your income exceeds the state median, you must complete the means test to determine your eligibility for Chapter 7 bankruptcy.

To start the means test, you must gather documentation related to your income and expenses for the six months following your bankruptcy filing. This documentation includes pay stubs, tax returns, and bank statements. 

Furthermore, you must ensure that all information you provide is accurate since inaccurate information may result in your bankruptcy filing being dismissed.

This Means Test has two parts. The first part compares your income to the state median income. If your income is below the state median, you’ll pass the means test automatically. If your income exceeds the state median, you’ll move to the second part of the means test. 

In the second part of the means test, you’ll deduct specific expenses from your income to determine whether you have enough disposable income to repay your debts through a repayment plan.

Why Not Means Test Required for Chapter 13

While the means test is essential to the Chapter 7 bankruptcy process, it’s not required for Chapter 13 bankruptcy in Louisville, KY. Chapter 13 bankruptcy involves creating a repayment plan to pay off your debts over three to five years. 

Unlike Chapter 7 bankruptcy, there are no income eligibility requirements for Chapter 13 bankruptcy. However, you must have regular income to create a repayment plan.

However, the absence of a means test in Chapter 13 bankruptcy doesn’t mean that the process is any less complex. A feasible repayment plan requires a detailed analysis of your income, expenses, and debt. 

So, it’s essential to work with an experienced bankruptcy attorney in Louisville, KY, to ensure that your repayment plan accurately reflects your financial situation and maximizes the chances of approval by the bankruptcy court.

In addition to the repayment plan, Chapter 13 bankruptcy involves a trustee overseeing the repayment process and ensuring that creditors receive their entitled payments. The trustee also plays a role in resolving any disputes that may arise during the repayment process, ensuring that the repayment plan stays on track.

Ultimately, whether you choose Chapter 7 or Chapter 13, bankruptcy depends on your individual financial situation. If you have a regular income but struggle to repay your debts, Chapter 13 bankruptcy may be a more viable option. 

On the other hand, if your income is below the state median and you have little to no disposable income, Chapter 7 bankruptcy may be the better choice. In either case, working with a knowledgeable bankruptcy attorney in Louisville, KY, can help you navigate bankruptcy and achieve the necessary debt relief.

Choosing the Right Type of Bankruptcy: Chapter 7 vs Chapter 13 

Chapter 13 bankruptcy is an option for individuals with a regular income who want to restructure their debts through a repayment plan. 

In comparison, Chapter 7 bankruptcy is available for individuals who meet specific income eligibility requirements.  Both Chapter 7 and Chapter 13 will discharge debts.   But a Chapter 13 provides time so that debts can be managed over up to five years to pay off a debt or bring it current. 

Here are some key differences between the two types of bankruptcy filings in Louisville, KY:

Eligibility Requirements:

  • Chapter 13 bankruptcy: There are no specific income eligibility requirements for Chapter 13 bankruptcy. However, you must have a regular income that is sufficient to cover your monthly expenses and make payments towards your repayment plan.
  • Chapter 7 bankruptcy: To be eligible for Chapter 7 bankruptcy, you must meet the income eligibility requirements set by the means test. If your income is below the state median, you may qualify for Chapter 7 bankruptcy. If your income is above the state median you automatically pass the means test.  You may still qualify if your reasonable expenses do not leave enough to make a meaningful repayment. 

Debt Discharge:

  • Chapter 13 bankruptcy: Debt discharge in Chapter 13 bankruptcy is limited to debts that are not fully paid off under the repayment plan. At the end of the repayment plan, any remaining unsecured debts are discharged.  The meaning of Discharge is that you are permanently no longer legally obligated to pay debts.
  • Chapter 7 bankruptcy: Debt discharge in Chapter 7 bankruptcy is much broader. Most unsecured debts, such as credit card debts and medical bills, are discharged entirely. However, some debts, such as student loans and tax debts, may not be eligible for discharge.

Repayment Plan:

  • Chapter 13 bankruptcy: You’ll create a repayment plan that lasts between three and five years. During this time, you’ll make monthly payments to a trustee, who will distribute the payments to your creditors. The bankruptcy court must approve the repayment plan and be feasible based on your income and expenses.
  • Chapter 7 bankruptcy: There is no repayment plan in Chapter 7 bankruptcy. Instead, your non-exempt assets are liquidated to pay off your creditors, and any remaining unsecured debts are discharged.

Overall, Chapter 13 bankruptcy is a better option for individuals who have a regular income.  Chapter 13 allows you to restructure debts through a repayment plan.   Interest rates for auto loans may drop in a Chapter 13.  Auto loans which are 910 days old may only have to repay what the car is worth. 

Chapter 7 bankruptcy, on the other hand, is a better option for individuals who meet the income eligibility requirements.  You have to also not have gotten a Chapter 7 discharge within the prior 8 years.  But both the Chapter 7 and the Chapter 13 discharges debts entirely. 

The decision to file for bankruptcy should be made after carefully considering

  1. your financial situation,
  2. income,
  3. expenses,
  4. Property you need to keep and
  5. long-term goals.

Losing property

You can lose property in a Chapter 7 bankruptcy.   If the trustee discovers assets he can sell and pay to creditors then you probably cannot convert to a Chapter 13 to save the property or dismiss the case.   You can generally always dismiss a Chapter 13.  Fraud can however prevent a debtor from dismissing a case.

It’s crucial to work with an experienced bankruptcy attorney in Louisville, KY, who can help you make an informed decision and guide you through the bankruptcy process.

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