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How the bankruptcy means test works

On Behalf of | Jan 7, 2022 | Uncategorized |

Many consumers in Virginia, choose Chapter 7, which is a liquidation bankruptcy, or Chapter 13, which is a repayment plan to remove debt. If consumers choose Chapter 7 bankruptcy, they must pass a means test before they can proceed.

Overview of the means test

Congress instituted the bankruptcy means test to ensure that high-income filers cannot abuse the system to avoid paying debts. The first part of the means test compares the filer’s income to the average state income for a household of a similar size. If they pass this portion of the test, they may proceed to file, and no further testing is needed.

The second part of the means test determines disposable income by adding allowed expenses and subtracting them from the gross income. The expenses must pass the IRS expense test, which means expenses that the IRS deems essential for the taxpayer. Allowed expenses are based on the IRS national standards, which include food, housing, out-of-pocket medical costs, utilities and transportation.

When consumers fail the test

If consumers fail both parts of the means test, they cannot file Chapter 7 and must convert to Chapter 13. Since it is based on six months of income, they can try again if they expect a change in income. A consumer may qualify to bypass the means test with a few exceptions or defend the necessity.

Filers who think their Chapter 7 cases have been unfairly dismissed must prove their hardship. Veterans with at least a 30% disability rating who incurred half the debt on active duty can commonly bypass the test. If a consumer’s business debt is 50% of all debt, they commonly do not have to take the test.

While bankruptcy can remove certain debts, it remains on the credit report for several years. Debtors should study all options carefully and meet with a financial advisor.