Chapter 7 and the Means Test (Form 122-A)

The chapter 7 means test explained!

Chapter 7 means test refers to a requirement for individuals who wish to file for bankruptcy under Chapter 7 of the U.S. Bankruptcy Code.

Chapter 7 bankruptcy allows individuals to discharge most unsecured debts, such as credit card debt and medical bills, and start fresh financially. However, not everyone can file for Chapter 7 bankruptcy.

To qualify, an individual must pass the means test, which compares their household income to the median income for their state. If their income is below the median, they can file for Chapter 7 bankruptcy. If their income is above the median, they may still be able to file, but they must pass a second part of the means test, which takes into account their expenses and debt payments.

The purpose of the means test is to prevent individuals with higher incomes from abusing the bankruptcy system and to ensure that those who truly cannot afford to pay their debts have access to bankruptcy relief. The means test is a complex calculation, and individuals considering bankruptcy should consult with an experienced bankruptcy attorney to determine whether they qualify for Chapter 7 bankruptcy. Even in NJ, with the higher median income figures and deductions permitted under the IRS rules, the means test is not a simple task. Debtors will require the knowledge and experience of a seasoned NJ Bankruptcy attorney.

Here are some additional details about the Chapter 7 means test:

• The means test was introduced in 2005 as part of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA).
• The test is used to determine whether an individual has enough disposable income to pay back their debts over time through a Chapter 13 repayment plan, rather than having their debts discharged in Chapter 7 bankruptcy.
• The means test is based on the individual’s income for the six months prior to filing for bankruptcy. If their income has decreased since then, they may be able to argue for an exception to the means test.
• The median income used for the means test varies by state and household size. The Census Bureau publishes the median income figures annually.
• If an individual’s income is above the median, they must fill out Form 122A-2, which calculates their disposable income using IRS expense standards and other factors.
• If an individual’s disposable income is too high, they may not be able to file for Chapter 7 bankruptcy, but instead must file for Chapter 13 bankruptcy, which requires a repayment plan over three to five years.
• In some cases, expenses not covered by the IRS expense standards may be allowed if they are necessary for the debtor’s health and welfare or the successful operation of their business.

It’s worth noting that the means test can be a complicated calculation, and even small changes in income or expenses can have a big impact on the outcome. That’s why it’s important to work with an experienced bankruptcy attorney who can help navigate the means test and ensure that you’re making the best decision for your financial situation.