Written by Charleston Bankruptcy Lawyer, Russell A. DeMott
If you want to file a Chapter 7 bankruptcy, and your income is over the median income for your state, you must take a “means test” to help the court determine whether you are eligible for Chapter 7 bankruptcy. The purpose of the means test is to help the court determine whether you should be allowed to file a Chapter 7 bankruptcy or whether you should be required to do a Chapter 13 bankruptcy.
First, you need to understand some basic things about Chapter 7 and Chapter 13. Chapter 7 is known as “straight bankruptcy or liquidation bankruptcy” (although in 99% of the cases no property of the debtor is sold). There is no payment plan in Chapter 7. You file your case, and if all goes well, you get a discharge order form the Bankruptcy Court stating that you no longer owe your debts. (Of course there are exceptions to the discharge, like child support, alimony, some taxes, and student loans, just to name a few.)
Chapter 13, by contrast, is all about a payment plan. You propose to make payments to the Chapter 13 Trustee for a period of time, usually three to five years. Once you complete your plan, you then get a discharge. As with Chapter 7, there are some debts than cannot be discharged.
Second, there are two types of debtors who file Chapter 13 cases: (1) Those who want to file a Chapter 13 because of some special benefit to their particular debt situation, and (2) those who must file a Chapter 13 because they simply don’t qualify for Chapter 7. I could write a whole series of blog posts about why someone would want to do a Chapter 13, but those aren’t the cases we’re dealing with here. Instead, we’ll be addressing situations in which debtors must do a Chapter 13 in order to get a bankruptcy discharge.
The Bankruptcy Code provides that it would be an “abuse” for some people to file Chapter 7. In essence, it’s the principal of “to whom much is given, much shall be required.” The Bankruptcy Code says that if you have enough income to fund a Chapter 13 to repay your creditors, you should. On the other hand, if there’s no money available in your budget to repay your creditors, the law allows you to file Chapter 7. For some debtors, the means test is one tool the court uses to sort out which cases should be Chapter 7 cases and which ones should be Chapter 13 cases. Note that I said the means test was one tool.
IMPORTANT: Just because you “pass” the means test doesn’t mean you automatically qualify for a Chapter 7 bankruptcy, but passing it certainly helps.
In my next post on the means test, I’ll explain “median income” and how we determine a debtor’s income for the means test.