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Understanding the bankruptcy means test

Bankruptcy is a legal procedure that can be used for debt relief. In order to qualify, certain criteria have to be met. Florida residents who are considering Chapter 7 bankruptcy should know that the bankruptcy means test is one of the eligibility requirements.

The two-part testwas initially designed to limit how many people would qualify for a Chapter 7 bankruptcy. It is a test that determines the amount of disposable income and takes into account certain factors, such as expenses, net income and the size of a family. Individuals may opt for a Chapter 13 bankruptcy if they want to retain possession of assets or if they are unable to qualify for a Chapter 7 filing.

Whether or not the applicant’s household income is less than the state’s average income is determined with the first stage of the test. Income information from the previous six months is generally used, although times of unemployment within that period is factored into the test as are any increases of income. Based on data from the Executive Office for U. S. Trustees, 78 percent of applicants in 2013 passed the first part of the test.

The second portion of the test gives those who failed the first stage another opportunity to qualify. It determines, after the allowable expenses of the last six months has been verified, whether an individual’s disposable income is low enough. A failure of the test means filing for Chapter 13 or waiting six months to retake it.

While Chapter 7 involves the liquidation of a debtor’s non-exempt assets with the proceeds used to pay off creditors, Chapter 13 provides for a restructuring of debts under a court-approved repayment plan that lasts from three to five years. It is meant for people who have a regular source of income, and an lawyer can outline the other eligibility requirements.

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