Despite working hard, many people find that there is not enough money to go around at the end of each month. As a result, it is only a matter of time before bills and other financial obligations begin to pile up. If you are in this situation, you may have considered the options available to you, including filing a Chapter 7 bankruptcy.
Having researched Chapter 7, you may have been discouraged from pursuing it further, because you learned that you must pass a means test in order to get relief from your debts. You may have heard that the means test is difficult to pass and would effectively bar you from being relieved of your debts. Fortunately, this is likely not the case, as there are several myths and misconceptions about this aspect of bankruptcy.
What is the means test and what does it entail?
During the mid-2000s, Congress enacted bankruptcy reform measures that required all those seeking relief from their debts in Chapter 7 bankruptcy to pass a means test before seeking relief. The means test is essentially an income cap. If your gross income exceeds the means test cap, you may be prevented from filing a Chapter 7 bankruptcy to eliminate your debts. The means test is based on your gross income and household size. The means test increases with each dependent member of your household. Although you may have heard that the test is a difficult hurdle to meet, in reality, most Chapter 7 filers have no problem satisfying it.
If your income is at or below the median income for a household of your size in New Jersey, you automatically qualify for a Chapter 7 bankruptcy. However, if your income is above the median, further examination is warranted and you may still be able to seek Chapter 7 relief. In such cases, the court looks carefully at your disposable income. This is the income left over after your mortgage, taxes of all types, rent and other necessary living expenses are deducted from your income. Expenses such as child or spousal support are deducted from income as well. Hence, it is very likely that one who does not initially meet the means test may in fact qualify after all allowed expenses and deductions are carefully considered.
What if I fail the means test?
Because most Chapter 7 filers have little disposable income, very few filers fail the means test. However, if after all analyses your gross or disposable income is too high, all hope is not lost, as you can seek at least a partial relief from your debts by filing Chapter 13 bankruptcy instead. In a Chapter 13, you can keep all your assets, as your disposable income is applied to pay your debts over a three to five year period in a court monitored plan. However, in most cases, only a fraction of your unsecured debts, such as credit cards or medical bills, are paid off during this period. Upon completion of your plan, the remaining unsecured debts are eliminated, giving you a fresh start financially. Although all of your debts may not be eliminated, as in a Chapter 7, a Chapter 13 may still be a useful tool to re-structure and get your finances back on track.
Is Chapter 7 right for me?
The means test is a very difficult and complex analysis. It is also important for you to know that just because you qualify for Chapter 7, does not mean that it is automatically the best debt relief option for you. Since the choice of debt relief method can mean the difference between success and failure, it is vital to consult with an experienced bankruptcy attorney to learn about the best option for YOU under your particular circumstances.