When your debt piles up and you owe more than you can afford to pay, it may be time to file for bankruptcy. Filing for bankruptcy, however, is not an easy process. It requires you to compile all of your financial records, attend a credit counselling, and complete and submit a number of forms.
Aside from that, you may also have to work with a bankruptcy lawyer on a chapter 13, chapter 11, or chapter 7 filing. Of course, your lawyer will recommend the suitable bankruptcy type to file. Before you do all of this, you may have to take a test.
Why the Means Test Matters
The test, also known to banks and legal counsels as the “means test,” determines if your eligible to file for chapter 7 “liquidation bankruptcy,” or you’re restricted to chapter 13. Why does qualifiying for chapter 7 matter?
Chapter 7 bankruptcy discharges most of the debt you owe, including credit card debt, medical bills, and personal loans, excluding alimony, child care, student loans, and other taxes. So you will be relieved of most of the debt you owe.
Every debtor who chose to file for a chapter 7 bankruptcy needs to pass the test before any debt is relieved. As the bankruptcy law dictates, only debtors with presumed monthly incomes lower than a specified portion of their debt can pass the test.
Additionally, the means test also reflects your financial situation in the past six months. The result proves to your creditors and the legal counsel in your state that you have exhausted every means possible to pay your debt but remain unable to.
This test is only for your consumer debt, like credit card or mortgage. You don’t need to take one if what you owe is primarily for your business.
What Happens When You Fail the Means Test
Failing the test means you aren’t eligible to file for chapter 7 bankruptcy. This is either due to your higher than average monthly income or the existence of other assets that you can use to pay your debt.
There is no appeal after you fail the test. You can choose to either file for another type of bankruptcy or wait for another six months to retake the test. If you think that after an additional six months your financial situation meets the threshold for chapter 7 debt relief, then you should file for it again.
One of the most basic types of bankruptcy aside from chapter 7 is chapter 13. You can file for a chapter 13 bankruptcy in case you fail the Means Test and have a presumably higher than average monthly income. This type of bankruptcy segregates your debt and allows you to pay them in three to five years.
Bankruptcy is a complicated process, but filing for it will help decrease your financial burden. The result of the Means Test allows you to file for a chapter 7 bankruptcy, helping you to start fresh without the burden of debt on your shoulders.