Understanding the Chapter 7 means test

Many in East Orange may make a lot of incorrect assumptions about personal bankruptcy. Chief among them may be the notion that any bankruptcy case will make one's debts simply go away. Yet the reasons for this assumption is understandable; after all, with a Chapter 7 bankruptcy, many debts can be discharged. It may be the reason why Chapter 7 is the most common form of personal bankruptcy. Indeed, per information shared by the American Bankruptcy Institute, nearly 64 percent of all non-commercial bankruptcy filings in the second quarter of 2018 were Chapter 7 cases. 

One should take notice, however, that it is likely the benefit offered by a Chapter 7 bankruptcy that makes it such a popular choice, and not necessarily the availability. That is because people must first qualify to file under Chapter 7. That eligibility is determined by the Chapter 7 "means test." This is simply a computation showing what one's debts are in comparison to their available assets and income. It starts by determining one's net income (or their net aggregate household income if they are filing with a spouse). Certain allowed expenses are subtracted from one's income totals when making this determination. Once available income is determined, it is projected out over five years to see if it might be enough to cover one's current liabilities. 

According to the Administrative Office of the U.S. Courts, if one's projected income is more than $12,850 or 25 percent of their total nonpriority unsecured debts (as long as that total is less than $7,700), they fail the means test. If they fail, then they may be asked by the court to follow the debt repayment plan they create with the credit counseling agency they consulted with prior to filing for bankruptcy, or amend their case to a Chapter 13. 

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