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The Chapter 7 bankruptcy means test

On Behalf of | Dec 4, 2022 | Chapter 7 Bankruptcy

Filing a Chapter 7 bankruptcy in California and around the country became a little more difficult in 2005 when Congress revised the nation’s bankruptcy code. To prevent abuses of the financial system and protect lenders from consumer fraud, an income test was introduced to prevent people from escaping debts they could afford to pay. That test is now more commonly known as the Chapter 7 means test.

The first part of the means test

The first part of the means test is performed using data found on Chapter 7 bankruptcy petitions. To pass the means test, the income stated by the petitioner must be less than the median income for a household of the same size. Wages, salaries, tips, alimony, child support and pensions are considered when the Chapter 7 means test is performed, but Social Security Disability and retirement benefits are not.

The second part of the means test

Failing the first part of the means test does not necessarily lead to a Chapter 7 petition being denied. When petitioners earn more than the state median income for households of the same size, a second set of calculations is run that factors in their monthly expenses. This is why it is important to be thorough and include all expenses and household members when competing bankruptcy forms.

Bankruptcy myths

The Chapter 7 means test is sometimes portrayed as an almost insurmountable barrier for people seeking debt relief, but that is just one of many myths surrounding bankruptcy. The bankruptcy laws exist to give people who have run into financial problems the chance to escape debt and enjoy a new start, but many choose not to seize this opportunity because they believe things that are not true or worry about things that may never happen.