What Happens if You Fail the Chapter 7 Bankruptcy Means Test
Filing for bankruptcy is never an easy decision, as it can have a significant impact on one’s financial future. If you’re struggling with mounting bills, persistent calls from collectors, or increasing debt despite regular payments, bankruptcy can seem like the best course of action. In particular, you may be considering Chapter 7, often referred to as liquidation bankruptcy, to help you quickly eliminate qualifying debts. However, to qualify, you must pass the means test. So, what happens if you fail this test? Fortunately, you still have several options.
What Is the Means Test?
The means test is an assessment used to determine if you have disposable income to repay your debts. The means test aims to prevent high-income individuals from wiping out debt through Chapter 7 when they have the financial ability to repay some of it.
The first part of the means test involves calculating your current monthly income, which is based on your gross earnings for the past six months, and then dividing it by 6. If the resulting figure is lower than your state’s median income for your household size, you automatically pass and can file Chapter 7. If your income is above the median, you proceed to the next step, which involves deducting certain allowable expenses, such as housing, healthcare, child support, transportation, and other necessities. The remaining amount is considered your “disposable monthly income.” If, after the deduction, you have less than $100 per month, you may be eligible for Chapter 7.
What Happens if You Fail the Means Test?
Failing the means test doesn’t automatically bar you from bankruptcy relief. What this means is that Chapter 7 may not be an option at the moment, but you can still explore other types of bankruptcy, such as Chapter 13. Not passing the Means Test means that you are considered a higher wage earner under Bankruptcy Law.
- Chapter 13 as an Alternative
Chapter 13 enables you to have a structured repayment plan that lasts three to five years. So, instead of eliminating the debts immediately, you reorganize them into manageable monthly payments. Chapter 13 can help you keep your property, stay protected from creditors, and at the end of the plan, any remaining qualifying debt may be discharged.
Something interesting about Chapter 13 is that it has its own Means Test, but it works differently. There are additional deductions you may take under the Chapter 13 Means Test. To qualify, you must show that after paying your necessary expenses and secured debts, you still have income left to fund the repayment plan. It is the disposable income that determines how much you’ll be paying each month to the bankruptcy trustee and who distributes the funds to your creditors.
- Passing the Means Test Later
Sometimes, the Means Test doesn’t reflect your current economic reality, and you could pass with another try. This may be applicable if, for example:
- You recently lost income, but your six-month average is still high
- Certain allowable expenses weren’t included the first time
- You qualify for deductions related to medical care, childcare, or other necessities
- There are special circumstances that require you to pay certain expenses on a monthly basis that are not otherwise accounted for in the Means Test deductions
A bankruptcy attorney can help you review the numbers, identify overlooked deductions, or refile when your financial picture is more accurate.
Contact a Pennsylvania Bankruptcy Attorney Today
If you failed the means test and want trusted legal guidance, contact our Lehighton & Carbon County bankruptcy attorney, Adam R. Weaver. Esq., for help identifying the best option tailored to your situation.
