Can you pass the Chapter 7 means test?

If you're considering filing for individual bankruptcy to deal with your debts, you likely already know that you have the option of Chapter 7 or Chapter 13. Both have advantages and disadvantages. Chapter 7 bankruptcy allows most unsecured debts to be discharged. Chapter 13 is a restructuring rather than a discharge of debts, but allows people to keep their assets.

However, it's important to understand that not everyone can qualify for Chapter 7. You have to pass a means test. What's involved in a means test? There are two parts to it.

The first step is determining whether your income (based on the previous six months) is below the state's median average for the number of people in your household. The U.S. Department of Justice has a chart designating the median family income for each state. Adjustments can be made based on changes such as getting or losing a job. Your attorney can assist you with this to help make sure that you're using the right amount.

Most people -- in fact 88 percent of those who used the means test in 2013 -- qualified for Chapter 7 based solely on their income. However, you may still be able to choose Chapter 7 over Chapter 13 even if your income alone doesn't qualify you.

Step two is more complicated. It involves determining your disposable income. You need to add up your "allowable expenses" for the past six months. This includes things like rent, medical costs, clothing and groceries. The difference between those and your income is your disposable income.

It's essential to be thorough and honest when doing this and to provide supporting documentation. Your bankruptcy attorney can provide guidance on what expenses are allowed in New York.

If you qualify for both Chapter 7 and Chapter 13, it's essential to know what's involved with both of those options. Your bankruptcy attorney can provide information and advice and help you through the process. However, ultimately, it's your decision to determine what option is best for you and your family.

Source: NerdWallet, "The Bankruptcy Means Test: What It Is, Why It Matters," Sean Pyles, July 14, 2016

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