The Bankruptcy Means Test: Do You Qualify for Chapter 7?
If you are considering filing for bankruptcy in North Carolina, you may have come across the term "Bankruptcy Means Test." This test is a critical part of qualifying for Chapter 7 bankruptcy, which can offer individuals an opportunity to eliminate most of their unsecured debt.
However, understanding the process can be complicated, and it’s essential to know the requirements thoroughly before making any decisions.
Working with an experienced Chapter 7 bankruptcy attorney is crucial, as they can guide you through the process, help you complete the necessary paperwork, and make sure your case is filed correctly. At Cannon Law Offices in Greenville, North Carolina, we can provide you with the guidance you need.
Let’s explore the basics of the Bankruptcy Means Test and how it determines whether you qualify for Chapter 7 bankruptcy in North Carolina.
What Is the Bankruptcy Means Test?
The Bankruptcy Means Test is a formula used by bankruptcy courts to determine whether you qualify for Chapter 7 bankruptcy. Chapter 7 is the most common form of bankruptcy for individuals, as it allows for the discharge of most unsecured debts, such as credit card balances, medical bills, and personal loans.
However, not everyone is eligible for Chapter 7, and the Means Test helps determine your eligibility based on your income, family size, and living expenses.
In essence, through the Bankruptcy Means Test, individuals with a higher income, who can afford to repay a portion of their debts, are instead directed to Chapter 13 bankruptcy, which involves a repayment plan over three to five years.
The test consists of two parts:
Median Income Comparison
Disposable Income Calculation
Let’s look at each part in detail.
Part 1: The Median Income Comparison
The first part of the Bankruptcy Means Test compares your household income to the median income in North Carolina. This comparison is based on your average monthly income over the past six months, before taxes and deductions. The income includes wages, self-employment income, rental income, and other sources.
North Carolina’s median income figures vary based on household size, so you need to refer to the specific median income for your family size. If your income is below the state’s median for your household size, you generally pass the Means Test and may qualify for Chapter 7 bankruptcy.
However, if your income exceeds the median, you must proceed to the second part of the test.
Let’s now look at the second part of the Means Test—calculating your disposable income.
Part 2: The Disposable Income Calculation
If your income exceeds the median level, the second part of the Bankruptcy Means Test will determine whether you have enough disposable income to repay creditors. Disposable income refers to the amount of income you have left after deducting your necessary monthly expenses. These expenses are defined by the bankruptcy code and include items such as:
Mortgage or rent payments
Utilities (gas, electricity, water)
Transportation costs
Food expenses
Medical bills
Childcare expenses
Once your deductions are made, your disposable income is calculated. If you have enough disposable income to pay a significant portion of your debts over a period of three to five years, you may not qualify for Chapter 7 bankruptcy. In this case, you might be directed to file for Chapter 13 bankruptcy instead, where you’ll repay your debts under a structured plan.
Key Deductions in the Means Test
Some common expenses that are deducted from your income during the Means Test include:
Housing costs: Mortgage or rent payments, property taxes, utilities.
Healthcare expenses: Insurance premiums and out-of-pocket medical costs.
Child support and alimony: Payments made for the support of children or a former spouse.
Transportation costs: Car payments, fuel, maintenance, and insurance.
If your disposable income is low enough after these deductions, you may still qualify for Chapter 7 bankruptcy, even if your income is above the median.
How to Calculate Your Income and Expenses for the Means Test
The Means Test calculation is intricate, and it’s easy to make mistakes. Incorrectly reporting your income or expenses could result in your case being denied or delayed. It’s crucial to gather all the necessary documentation, including pay stubs, tax returns, bank statements, and other financial records, to make sure your information is accurate.
To help you manage the process, working with a Chapter 7 bankruptcy attorney is essential. They can help you gather the right documents, accurately calculate your disposable income, and make sure you are in compliance with North Carolina’s bankruptcy laws.
Let’s explore the important role that a Chapter 7 bankruptcy attorney plays in helping you managing this process effectively.
Why You Should Work with a Chapter 7 Bankruptcy Attorney
Filing for bankruptcy is a significant legal and financial decision, and the process can be overwhelming. A Chapter 7 bankruptcy attorney is not only well-versed in the means test but can also help you understand the ins and outs of the entire bankruptcy process. Here are a few reasons why you should consider working with an attorney:
Knowledgeable guidance: Bankruptcy laws are complicated and subject to change. A Chapter 7 bankruptcy attorney can provide up-to-date advice on eligibility, exemptions, and the bankruptcy process.
Accurate paperwork: Filing for bankruptcy requires submitting several documents, including your income, expenses, assets, and liabilities. A bankruptcy attorney will make sure all forms are completed correctly, which can prevent delays or denials.
Maximized exemptions: In North Carolina, you may be eligible for certain exemptions that allow you to keep valuable assets like your home or car. A bankruptcy attorney can help you understand what you can and can’t exempt, making sure that you keep as much as possible.
Peace of mind: Filing for bankruptcy can be an emotional and stressful experience. Having an experienced attorney by your side can alleviate the burden and give you confidence in your decision.
If you are unsure about your eligibility for Chapter 7 bankruptcy, consulting with a Chapter 7 bankruptcy attorney can provide clarity and help you take the right steps forward.
Benefits of Filing for Chapter 7 Bankruptcy
While qualifying for Chapter 7 bankruptcy can be a challenge, the benefits of this process are numerous for those who do qualify. Here are just a few advantages of filing for Chapter 7 bankruptcy:
Elimination of unsecured debts: Chapter 7 bankruptcy allows for the discharge of most unsecured debts, such as credit cards, medical bills, and personal loans.
Fresh start: Once your debts are discharged, you can begin rebuilding your financial future without the constant burden of creditor calls or late fees.
Relief from harassment: Filing for Chapter 7 bankruptcy immediately stops creditor actions, including phone calls, wage garnishments, and lawsuits.
Quick process: Unlike Chapter 13 bankruptcy, which requires a repayment plan lasting several years, Chapter 7 bankruptcy typically takes a few months to complete.
Filing for bankruptcy isn’t a decision to be taken lightly, but for many people in North Carolina, it offers the opportunity for financial freedom. To determine if you qualify, it’s essential to work with an experienced Chapter 7 bankruptcy attorney.
What Happens After You Pass the Bankruptcy Means Test?
If you pass the Bankruptcy Means Test, your next step will be to file your Chapter 7 bankruptcy petition with the bankruptcy court. Once the petition is filed, your case will be assigned to a bankruptcy trustee who will oversee your case and review your assets, liabilities, and income.
At this stage, it’s important to remain in close communication with your Chapter 7 bankruptcy attorney. Your attorney will help you prepare for the 341 meeting (also known as the meeting of creditors), where you’ll be questioned about your finances by the trustee.
In the event that your case is approved, most of your unsecured debts will be discharged, and you’ll receive a fresh start.
Speak to a Chapter 7 Bankruptcy Attorney Today
By working with an attorney, we can can increase your chances of a successful bankruptcy filing. If you are considering filing for Chapter 7 bankruptcy, reach out to us at Cannon Law Offices today for a consultation. We’re proud to serve clients in Greenville, North Carolina, as well as the Pitt County area, including Beaufort County, Craven County, Lenoir County, Martin County, and Greene County. Call us at the Cannon Law Offices today.