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How Does the Chapter 7 Means Test Work?

Posted on September 10 2013 by Jenna Major

How Does the Chapter 7 Means Test Work?

There is a large number of people filing for Chapter 7 bankruptcy in order to receive debt relief. Because of this the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 created a means test to help figure out whether a filing is presumed abusive to the bankruptcy process. Those who fail the means test requirement are forced to file under Chapter 13 bankruptcy. This means that the debtor has to repay his unsecured creditors through a three- or five-year repayment plan.

But there are certain situations where a debtor may be allowed to file for Chapter 7 even if he does not pass the means test. For example, if the petitioner is called to active duty in the military or he has a critical medical condition. The extraordinary set of circumstances results in bigger expenses and smaller net income. The means test considers the debtor’s average monthly expenses, income, and debt payments over the last 6 months prior to a filing. That is why any substantial change in income or expenses would be regarded extraordinary circumstances, like a critical illness. The specifics of special circumstances are not found in the bankruptcy code. The bankruptcy judge determines whether the special circumstances exist in a particular case.

A business bankruptcy is not subject to a means test. It only applies to personal bankruptcy that mostly involves consumer debt. The means test is also not applicable in mortgages, business debt, taxes, judicial judgments, or if most of the debt is not consumer debt. In case the amounts and number of non-consumer and consumer loans are almost the same, then other factors will be considered. Some of these factors are the types of loans obtained and where they were used.

The means test forms are lengthy, but they are not difficult to understand. Chapter 7 bankruptcy involves a liquidation process that takes 4 to 6 months. The debtor will not lose everything he owns as the bankruptcy law provides exemptions to properties. The exempt properties are items that are essential for the debtor to get a fresh start. However, valuable items are usually sold by the trustee in order to repay unsecured debts.

If a debtor's income is above the state median income, the means test computes whether there is still adequate money to pay at least 25 percent of non-priority, unsecured debt or $10,950 (this figure increases over time), whichever is lower, after his basic living necessities are met and the required debt payments are made. But if the facts of a particular case warrant, the judge can rule that allowing a debtor to file under Chapter 7 would be abusive to the bankruptcy process. In this case, the debtor can be forced to convert his Chapter 7 case into a Chapter 13. But those who plan to file for bankruptcy do not have to worry so much about failing the means test because most bankruptcy files under Chapter 7 bankruptcy pass the means test.