The Means Test
Under most circumstances, the majority of debtors will want to file a chapter 7 bankruptcy because, unlike a chapter 13, with a chapter 7, you will not have to make monthly payments for three to five years. However, to file a chapter 7 bankruptcy, you will have to pass the means test.
In 2005 the Bankruptcy Abuse Prevention and Consumer Protection Act was passed, which requires all debtors to take the means test. The means test’s objective is to limit a chapter 7 bankruptcy (which can be completed in three to four months instead of three to five years for a chapter 13) to those debtors who honestly cannot pay all or a portion of their outstanding debt. If your income exceeds, the maximum amount allowed on the means test may be forced to file a chapter 13 bankruptcy.
To pass the means test your gross income must not exceed the maximum amount allowed via the bankruptcy statutes. The maximum salary amount The US census board and Internal Revenue Service guidelines set the maximum salary amount in the means test. The means test varies from state to state and the number of dependents in your household. The monthly income, for the means test, is calculated using the debtor’s average last six months income. Please note, just because you are under the amount listed in the means test, if you have little expenses, you still may not be eligible for a chapter 7. For example, if you live rent free, and make minimum wage, you could feasibly have enough disposable income that the Bankruptcy Court would require to file a chapter 13.
If you earn above the maximum amount allowed under the means test you still could potentially be able to file a chapter 7 bankruptcy. However, you will have to to have high expenses that result in you having little income left over to pay your outstanding debts. Examples of debts that could allow you to file a Chapter 7 even though you do not pass the means test are a high mortgage, car payments and expenses related to a chronic medical condition. Your living expenses though must be justified and steady. Therefore, you are only able to include certain expenses, and you are not allowed to claim unlimited expenses for a legitimate claim. For example, the Bankruptcy Court could rule that it is not justifiable to pay for your 23-year-old son's car payment or pay for his college tuition. Also, a non-disabled debtor would not be allowed $1,000 car payments. Chapter 7 bankruptcy, even if you don't pass the mean test if your debts are mostly business related debts. Also, unless you have a valid reason and you can prove it, your living expenses cannot exceed what the IRS deems reasonable for what your family should spend on necessities, such as food, clothing and other items. For example, a $200 car payment is reasonable in Las Vegas; but, a $700 car payment is not justifiable.