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Why is the bankruptcy means test essential?

If you have been researching the possibility of filing for personal bankruptcy, you may have come across something called the “means test.” If you are considering Chapter 7 bankruptcy, the means test is essential to understand because it determines whether you are eligible for Chapter 7 or will have to opt for Chapter 13.

Many people prefer Chapter 7 because it allows many debts to be discharged. Chapter 13, on the other hand, allows for a restricting of debts, but not an out-and-out discharge of them. The means test plays a role in both types of bankruptcy, but it’s particularly crucial to those seeking Chapter 7.

There are two parts to the means test. The first determines whether you qualify for Chapter 7. It compares your household income for the past six months against the median income for your state. The test factors in changes to your income, such as beginning or losing a job in that six-month period. The median household income in New York State is currently listed at $58,687.

It’s essential to accurately document your income when taking the means test. Your bankruptcy attorney can help you do that. If your income is below the median, you’ve passed it. If you choose, you can file Chapter 7 bankruptcy.

If your income is too high according to this part of the test, there is a second part that you can take. This part is also important if you decide to file for Chapter 13. It involves documenting “allowable expenses” for that same six-month time period. These include things like food, clothing and medical expenses.

Income minus allowable expenses equals “disposable income.” If your disposable income is low enough, you can still qualify for Chapter 7. It’s essential to be thorough but honest when reporting these expenses. Your bankruptcy attorney can provide guidance and help you file the appropriate documentation.

The second part of the test is used if you file for Chapter 13 bankruptcy to determine what your restructuring and repayment plan will be for your debts. Sometimes, even when people qualify for Chapter 7, they opt for Chapter 13 because they’re able to keep more of their assets.

If you are considering bankruptcy, it’s best to consult early on with an experienced New York bankruptcy attorney. He or she can guide you through the process and help you get back on a good financial path.

Source: Christian Science Monitor, “Why the bankruptcy means test matters,” Sean Pyles, NerdWallet, July 18, 2016

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