How Does the Chapter 7 Means Test Work?
Filing for Chapter 7 Bankruptcy in Dallas, TX
If you are interested in filing for Chapter 7 bankruptcy, you must first determine if you qualify by taking the means test, which will determine whether your income is low enough for you to file under Chapter 7 — rather than Chapter 13.
The Chapter 7 means test was designed to keep debtors with higher incomes from filing under this chapter, namely because it allows filers to discharge most, if not all, of their unsecured debts in a short period of time.
How the Means Test Determines Your Eligibility
The first step in the Chapter 7 means test is to compare your average monthly income to the median income for a family of your size in Texas. If your average income is less than or equal to the state median, you are eligible for Chapter 7 bankruptcy. However, if it is higher than the median, you will need to complete the next step in the means test.
Typically, the income calculation will include:
- Wages, tips, bonuses, and overtime
- Income from a business or farm
- Interest, dividends, and royalties
- Unemployment payments
- Pension and retirement income
- Workers’ compensation
- State disability insurance
- Child support or spousal support
- Income from rental properties
Step two of the means test will determine whether or not you have enough “disposable income” left over each month to repay your unsecured debts. If your disposable income is too high — after deducting certain monthly expenses — you would fail the means test. In other words, you would be prohibited from filing for Chapter 7 bankruptcy. Request a free consultation with the Dallas Bankruptcy attorneys at our firm to find out more.
I Didn’t Pass the Means Test — What Now?
If you have failed the Chapter 7 means test, it is important to understand that you still have the option to file for Chapter 13 bankruptcy. With this type of bankruptcy, you would reorganize your debts and make monthly payments over three to five years. Although it is a longer process, Chapter 13 is still a viable debt-relief solution.
Under Chapter 13, much of your unsecured debt can be discharged but your secured debt or debt that is not dischargeable under Chapter 7 will be given the highest priority. All of your debt and all of your income will be considered and your attorney will come up with a repayment plan that settles a large chunk of it over the next three or five years.
I Passed the Means Test, But the Judge Had Denied My Petition
The court is under no obligation to allow your bankruptcy to go through simply because you passed the means test. If your income is under the state median for your household size, judges can deny your petition under Chapter 7. It’s important to understand that legal precedent has favored bankruptcy judges in this regard. Those who have appealed denials after passing the means tests have lost their appeals.
While the means test is designed to determine if the debtor has the resources necessary to repay their creditors under Chapter 7, if the judge determines that the means test has failed in that goal, you may see your bankruptcy denied anyway.
Chapter 13 Can Be Converted Into a Chapter 7
In some cases, a debtor may be forced to file for Chapter 13. But something happens that prevents them from making their payments. In other words, they were going ahead with their Chapter 13 just fine, something affected their earnings or finances, and now they can no longer make their bankruptcy payments.
In this case, your bankruptcy attorney can petition the court to have a look at your current finances and show that your financial situation is insolvent. Your bankruptcy can be converted into a Chapter 7 or you may apply for a reduced monthly payment.
Exemptions to the Chapter 7 Means Test
There are few folks in a handful of situations for whom their income won’t matter in the granting of a Chapter 7 bankruptcy. That means that, regardless of your household income, you may still qualify for a Chapter 7 bankruptcy. These include:
Disabled veterans exemption
Disabled veterans can qualify automatically for a Chapter 7 bankruptcy but, just because you receive VA disability, doesn’t necessarily mean you’ll automatically qualify for Chapter 7. The bankruptcy code has specific requirements for qualifying under this exemption. In fact, there is another two-factor test that you will need to pass in order to qualify. The first criterion is that you have greater than 30% disability rating. Second, you will need to have incurred the majority of your debt while on active duty. These can also include “homeland defense activities”. Each of these has specific definitions as defined under Federal law. If you are unsure whether or not you qualify, you should speak to your bankruptcy attorney.
Non-consumer debt exemption
For debtors who have incurred the majority (more than 50%) of their debt through the operation of a business, you can also qualify for a means test exemption. Most people, however, will not qualify for this exemption. The unfortunate reason for this is that the non-equity portion of their home will be greater than their non-consumer debt. This isn’t always the case, however. Talk to your attorney about whether or not you may qualify for a non-consumer debt exemption.
Military reservist or national guard exemption
If you are a member of the national guard or military reserve, you may qualify for a Chapter 7 means test exemption. There are a couple of supplemental qualifications, however. You must have been on active duty for at least 90 days. A reservist will only have 540 days after his date of discharge in order to qualify under this exemption.
All of these exemptions are subject to one other qualification. The petitioner cannot be able to make payments on their current debt and their financial situation is insolvent. In broad terms, this is known as the Good Faith Requirement.
Understanding the Good Faith Requirement
It’s important to understand that trying to swindle the bankruptcy court by hiding assets is not a viable option. Even simple things like making a purchase that you hope to discharge in bankruptcy can be construed as bankruptcy fraud.
You will have to list all property, bank accounts, investments, income, and real estate during the bankruptcy proceedings. Some people believe that they can transfer ownership of this property prior to filing for bankruptcy in order to defraud their creditors during the liquidation process. But the bankruptcy trustee will be looking for precisely this kind of behavior.
Once you’ve made the decision to file for bankruptcy, you should suspend all financial transactions and let the trustee sort everything out. Under Chapter 7, you can exempt certain property from liquidation and protect assets up to a certain amount.
If your creditors suspect that you are attempting to defraud them, they can sue you and disrupt your chances of discharging your debts. If successful, the court may dismiss your entire bankruptcy. You can receive fines of up to $200,000 and, under Federal Law, imprisoned for up to 20 years. It just isn’t worth it.
Call Our Dallas Bankruptcy Lawyers
Are you interested in filing for Chapter 7 bankruptcy? If so, you should learn more about your debt relief options by contacting the Dallas bankruptcy attorneys at Allmand Law Firm, PLLC. We have already helped thousands of people overcome their debt! Call our office today to schedule your free financial empowerment session.
Contact Allmand Law Firm, PLLC at (214) 884-4020 to get started.