Many people do not realize that there is as second part of the means test where you look at deductible expenses. A bankruptcy attorney can help you understand how that works, but the purpose of this article is to explain it to you in simple terms.
The purpose of this article is to provide some insights to those deductible expenses and a primer for the means test.
Deductible Expenses Used in the Chapter 7 Means Test
One of the most common questions is how to pass the means test for Chapter 7. Deductible expenses may help.
As we mentioned in some paragraphs above, you stand a high chance of getting a discharge on your debt if your mean income is below the median income of your state of residence. However, if your income is above the median income in your state of residence, then you should subtract your monthly expense from your current monthly income. The remaining amount you get after the subtraction is your disposable income. If this disposable income falls less than the given disposable income for your state, then you can qualify for a Chapter 7 bankruptcy discharge.
These are expenses deducted before calculating a means test. Examples of those expenses are;
- Taxes paid on income
- Life insurance premium
- Child support and alimony
- Certain child upkeep expenses
- Gifts to charitable causes
- Compulsory deductions
In some instances, the bankruptcy law allows for the deduction of certain day-to-day expenses. However, you’ll have to provide the amount you’re claiming as an expense here.
Some examples of expenses that you’re allowed to deduct are:
However, you can’t claim beyond the allowable limit by law. The number of people in your household is also a factor in determining your allowable claim limit. It’s best to first confirm your allowable claim before you file for a bankruptcy discharge.
Debt collection agencies may be pursuing you for unpaid debt. Bankruptcy can often provide relief in these situations.
Carrying out a search on the internet about available debt relief methods will leave you with multiple options and bankruptcy alternatives. While most of those options are right, it’s only a few that are as effective as the Chapter 7 bankruptcy, and this is a no-brainer since it’s a debt relief tool that completely wipes a debtor’s financial obligation to its creditors.
However, getting a Chapter 7 bankruptcy discharge is no walk in the park as you’ll need to first pass a Means Test.
The Means Test is an addition made to the bankruptcy law in 2005. It works as a buffer against people abusing the process. If you pass this means test, then the chances are high that you’ll be issued with a bankruptcy discharge, however, not passing this means test means you’ll be asked to take different tests to check your disposable income.
But what does the mean test entail and how can one pass it? We’ll use the rest of this article to shed light on that. However, let’s first shed some light on the meaning of the means test.
What is a means test?
The bankruptcy means test as said earlier is a creation of the congress in 2005. It’s a tool to determine who qualifies to receive a Chapter bankruptcy discharge or not.
Before this test shows whether you qualify for a discharge under Chapter 7 bankruptcy, it first examines your income, the size of your household, and your expenses. All this is done to ascertain whether you still have enough disposable income after paying necessary expenses. Although this limits the number of people getting a bankruptcy discharge, the majority of applicants that take this test pass it.
When you’re calculating the means test, you need to focus more on your household income since the test is all about making a comparison between your household income and the median household income in your state. You’re said to have passed the test when your household income falls below the median household income in your state. If the reverse is the case, then you’re asked to undertake a different test.
You’re not expected to calculate the median household income for your state yourself as the figure is determined by the Census Bureau data. If someone does not qualify for a Chapter 7 bankruptcy, mean people consider debt settlement vs Chapter 13 bankruptcy.
Where to download the Chapter 7 Means Test Form
Are you determined to file for a Chapter 7 bankruptcy discharge but you don’t know where to obtain the form to get started? Don’t fret, you can download a copy of the Chapter 7 means test by visiting the United States court’s website. Apart from the means test, you’ll also be required to provide some information that can vary with the bankruptcy jurisdiction and state of residence.
Calculating the Current Monthly Income your Need for Means Test
As established earlier, the means test is the gateway to getting your bankruptcy discharge. And to calculate your current monthly income, then you’ll have to add your monthly income for the past six months. Then divide the sum by 6. For a more seamless calculation, you can use the calculator mentioned in the last paragraph of this article.
When calculating your monthly income, you must write down the income of every working member of the household.
During the calculation process, some information to include are:
- 1099 income
- Unemployment compensation
- Annuity payments
During the process of finding your current monthly income, it’s expected of you to use gross income and not net income. By gross income here, we mean your income before making any deduction. The only instance where you can make deductions is if you’re reporting rental or business income.
However, you may exclude income obtained as a result of the enactment of the Social Security Act (Income in this category includes SSDI, Social Security Retirement, and SSI). But the details of your earnings from these sources are still to be reported in the bankruptcy form.
Many people choose a Chpater 7 bankruptcy because a Chapter 7 is affordable. The bankruptcy means test can help, and your deductible expenses be crucial, especially if you are above the median. Hopefully this guide has been helpful to help you make the most informed decision.