What is the means test of Chapter 7 bankruptcy?

| Mar 4, 2021 | Bankruptcy |

There are two types of personal bankruptcy that Alabama residents may consider when they are stuck under the weight of burdensome financial debt. The first is Chapter 7 bankruptcy, which involves the liquidation or sale of a debtor’s assets to pay off their creditors. The second is Chapter 13 bankruptcy, which involves the establishment of a repayment plan for the satisfaction of a debtor’s outstanding financial obligations.

There are different requirements for each of these two bankruptcy processes, and for Chapter 7, one of those requirements is the means test. This post will discuss the means test and what is required for someone to file for Chapter 7 bankruptcy. This post does not offer any legal advice to readers and all individuals considering bankruptcy should contact trusted Alabama attorneys for help.

The requirements of the means test

The means test is applied to debtors in steps. The first step in the process involves a review of the debtor’s income over the 6 months preceding their bankruptcy filing. If the debtor’s income is less than the median income of the state they live in, then they can file for Chapter 7 bankruptcy.

If their income is more than the state’s median, then the debtor must move to the second step of the means test. They must deduct all of their expenses from their income to show just how much money they have to repay their creditors. If their adjusted income is insufficient to pay any of their creditors back, then they may qualify for Chapter 7 bankruptcy.

Choosing the right process for each individual

Even though Chapter 7 and Chapter 13 bankruptcy have different requirements, they both can help debtors achieve their goals of living without the burdens of financial obligations. The processes are suited to meet the needs of different individuals. A consultation with a trusted bankruptcy attorney can help a person figure out just which process is right for them.