According to Chapter 7 Bankruptcy rules, the Court empowers a Trustee to liquidate the debtor’s personal assets in order to repay the debt, at least partially. In most cases, filing for Chapter 7 results in the loss of assets so that your outstanding debt can be repaid.
If you file for Chapter 7 Bankruptcy, your application will be subject to a Means Test. This simply means the courts will examine whether or not you are eligible for Chapter 7 or Chapter 13 bankruptcy. Here, we outline the points that relate to the Chapter 7 Means Test.
In terms of the Courts, the Chapter 7 Means Tests encompasses calculating the following:
1. The debtor’s average income of the last 6 month. 2. Then, the average personal income is compared with the per head average income of the state. Suppose, the median personal income of a person is $20,000. Now, if the debtor’s personal income is below $20,000, then Chapter 7 can be applied to him/her. And if the debtor’s income is greater than the median ($20,000) then further steps of means test are carried out.
In the event that your average personal income exceeds the State’s Median income, the Chapter 7 Means Test evolves to include the following processes:
1. The second step calculates some more figures. It first subtracts some allowable expenses from the debtor’s actual personal income to find the “Disposable Income.” This disposable income is multiplied by 60 to make up the personal finance for the next 5 years of repayment period. 2. If the 5 year’s income exceeds $10,000 or more from the median, then chapter 13 is applied. But, if the debtor’s 5 year income exceeds the median and the monthly income is less than the monthly state median, then the last part of the mean test is executed.
As well, your disposable income should not exceed 25% of your unsecured debt. If it does, then you will not qualify for Chapter 7 Bankruptcy (Chapter 13 might still be an option).
In order to determine whether you will qualify for Chapter 7, you can complete these steps at home and measure your 6 month average and 5 year figure against your State’s median figures. Of course, if your numbers are close to the median, it is still worthwhile to speak with a professional who will need to complete this step anyway.
Of course, Chapter 7 and Chapter 13 bankruptcy should only be a last resort given the short- and long-term damage it causes to your credit score, finances, and emotional state. If you have the ability to repay your debt on a fixed schedule, you should explore such options before resorting to bankruptcy.