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How the bankruptcy means test determines Chapter 7 eligibility

| Jul 14, 2020 | Chapter 7 |

When you decide to file for personal bankruptcy, you may be working through your options and figuring out the differences between Chapter 7 and Chapter 13 filings. The two types have some fundamental differences, and not everyone is an eligible candidate for both types. If you wish to move forward with a Chapter 7 bankruptcy, which involves liquidating your assets to cover your outstanding debts, you must pass the bankruptcy means test to proceed.

What is the means test, and what does it entail? Per NerdWallet, the means test decides whether you are eligible for a Chapter 7 bankruptcy filing, or whether you should consider a Chapter 13 filing or alternative options.

Taking the test

The means test has two main components. The first part of the test requires that you compare your median household income against New Jersey’s median household income. When yours is the lower of the two, you pass the means test and may move forward with a Chapter 7 filing.

If you fail the first part of the test, you need to proceed to the second step, which involves you figuring out how much disposable income you have on hand after paying for all necessary, or “allowable” expenses. The amount of disposable income you have then determines whether you may move forward with the Chapter 7 bankruptcy process.

Trying again

If you fail the means test but do not want to initiate a Chapter 13 bankruptcy, consider waiting six months to see if your financial situation changes. At the six-month point, you have the option of retaking the means test, if you wish.

Find more about filing for personal bankruptcy on our webpage.