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The Chapter 7 means test

Should one ask the average Bloomfield resident to describe personal bankruptcy, the most likely answer would be that it forgives a person’s debts. What they are describing is a broad view of Chapter 7 bankruptcy. There is a good reason why most default to this assumption; Chapter 7 is the most popular form of bankruptcy. According to information shared by the American Bankruptcy Institute, nearly 64 percent of the non-business bankruptcy cases in the second quarter of 2018 were filed under Chapter 7.

There are other options when it comes to bankruptcy, yet with the option of having certain debts completely discharged, one might wonder why anyone would file under a different chapter. Indeed, most people may want to file Chapter 7, yet not everyone qualifies to do so.

The purpose of Chapter 7 bankruptcy is not to allow people to get out of having to pay their debts. Thus, a means test has been established to help determine who might be trying to abuse the privileges it offers. According to the website for the Federal Judiciary, the means test is conducted by comparing one’s disposable income to their liabilities. If their average monthly income is less than that of their same demographic for their state, then they pass the test and can file for Chapter 7. If it is not, and their aggregate monthly income (determined over a period of five years) is greater than $12,850 or 25 percent of their nonpriority unsecured debt, they cannot file under Chapter 7.

Failing the means test does not necessarily mean that personal bankruptcy is not an option to help one relieve their debts, however. They may still be able to file under Chapter 13.

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