What Is the Means Test?

Means test in Bankruptcy

Though you may not know the specific rules about bankruptcy, you are probably aware that there are different types of cases that enable you to discharge debt. The benefits of going through the process are significant, particularly for those who are burdened by mounting debt. There are certain advantages you gain right away, such as being free from creditor harassment. Other benefits take effect after your case, when you wipe out qualifying debts and look forward to a bright financial future. You will no longer feel the frustration and anxiety of not being able to pay monthly bills.

One type of bankruptcy available for many debtors is Chapter 7, also known as discharge or liquidation bankruptcy. As you might expect, there are many rules governing these cases. An important concept is eligibility, since Chapter 7 is only available to certain individuals.  In short, you qualify to file for Chapter 7 bankruptcy based on your income. There are different approaches to measuring whether or not you qualify, and one is the means test.

The details of the means test are complicated, and every case is different. Therefore, you will need assistance from an Arizona Chapter 7 bankruptcy attorney to ensure you can meet the requirements under this analysis for determining eligibility. You can also learn more about the means test by reviewing some basics 

Overview of Chapter 7 Rules

There are two aspects of a Chapter 7 bankruptcy case that help demonstrate how these cases work.

  1. Chapter 7 is considered discharge bankruptcy because it eliminates your debts without requiring you to pay creditors. You must meet the criteria set by bankruptcy laws for Chapter 7, which are strict and specific. One important qualification is your income, which is where the means test enters the picture.
  1. Liquidation is the second aspect of a Chapter 7 case that is important to understand. When you file your petition, the bankruptcy trustee takes control of your assets. Whenever possible, the trustee will sell your real estate and personal property to satisfy your debt to creditors.

In practice, the bankruptcy trustee may decline to liquidate items in a no-asset case. The point of selling them is to generate profit to pay creditors, but some assets may not make much. You may be allowed to keep the property when the trustee determines that efforts to sell would not be productive.

Eligibility for Chapter 7 Bankruptcy

To qualify for a discharge under Chapter 7 rules, you must meet the requirements established by law. Under the US Bankruptcy Code, your eligibility is determined according to income. If your earnings are below the state median income level for the State of Arizona, you automatically qualify for Chapter 7. 

When your income is above this threshold, the means test becomes relevant. Your earnings are still essential for assessing eligibility, but your monthly expenses are also considered. Examples include your mortgage, utilities, and costs of medical, property, and auto insurance. These values reduce your income, possibly enabling you to qualify for Chapter 7 where your default income would disqualify you.

Note that you still have options if you are unable to meet the state median income or means test for Chapter 7 bankruptcy. You can file a Chapter 13 case, in which the qualifications are relaxed. Your earnings remain a factor, but this is because the rules for this type of bankruptcy require that you have a job and source of income. 

What is the Means Test in Bankruptcy in Arizona

The reason that the means test plays a role in eligibility for Chapter 7 is because of the potential for misconduct in bankruptcy. According to the rules, if the person’s current monthly income is above the state median, the means test must be applied to determine whether filing Chapter 7 is “presumptively abusive.” If the petition does take advantage of the bankruptcy process to discharge debt, the case could be dismissed.

Specifically, filing Chapter 7 bankruptcy may be presumptively abusive if your income is too high according to a formula set by rule. The calculation includes an evaluation of your nonpriority, unsecured debt, earnings over the last 5 years, and a dollar value. Note that income does not include your retirement, Social Security benefits, and amounts from similar sources. 

After evaluating your income, the expenses allowed by statute are subtracted under the meant test. You may qualify for Chapter 7 if you meet the means test, which avoids the rule on presumptively abusive filings. 

Impacts on Chapter 13

If you do not qualify for Chapter 7 bankruptcy because your income does not meet the means test, you do have other options. You can file for Chapter 13 instead, and it is also possible to convert an existing case to Chapter 13. Instead of meeting a certain value, your income is crucial because of how it impacts the process. When you file for Chapter 13, the core of the case is the debt repayment plan you enter into with creditors. Employment is necessary to uphold your end of the bargain and make payments. You must have an income, which is why Chapter 13 is sometimes called the wage-earner’s bankruptcy.

Another very important impact of the means test on Chapter 13 is that the outcome dictates key terms in your debt repayment plan. The means test generates a value for your “projected disposable monthly disposable income,” meaning what you have left from your earnings after paying certain bills.

Debts You Cannot Eliminate in Chapter 7 

Being able to discharge debts in Chapter 7 is a significant benefit, but you cannot wipe out all amounts you owe to creditors. US bankruptcy rules prohibit the bankruptcy court from discharging:

  • Alimony;
  • Child support;
  • Certain types of taxes;
  • Fines and fees levied as part of a court case or judicial proceeding;
  • The amount you owe for a personal injury case that was the result of drunk driving; and,
  • Other debts designated by law.

In addition, keep in mind that you are unable to discharge secured debts because of the nature of the relationship with the creditor. When you have a secured debt, you have pledged the value of an asset to hold the lender’s financial interests. The most common type of secured debt is a mortgage, which is secured by real estate. You are unable to discharge the loan in Chapter 7 because the bank can always foreclose and get the value of your loan through sale of the home. Alternatively, the bankruptcy trustee could decide to sell your home and pay the lender through the proceeds.

Understanding Chapter 7 Exemptions

It is disturbing to think that the bankruptcy trustee could liquidate your home and other important assets, but the laws are in your favor. Bankruptcy rules allow for exemptions, and you can apply them in a Chapter 7 case to protect your ownership interest. Some additional facts can explain the role of exemptions.

  • The Arizona homestead exemption is $150,000 for individual filers and $300,000 for married couples filing jointly. You can protect your home, but only the value of the equity that you have accumulated. 
  • You may apply up to $6,000 for personal belongings and home furnishings.
  • Exemptions allow for up to $6,000 in equity in a vehicle.
  • You can protect $5,000 worth of equipment, tools, and other items related to operating your business or working in your profession.

In addition, you should be aware that a bankruptcy trustee cannot liquidate any amounts in a retirement account covered by the Employee Retirement Security Income Act (ERISA)

How a Bankruptcy Attorney Helps with Your Case

Determining whether to file for Chapter 7 or Chapter 13 is a crucial decision you must make early on for bankruptcy, and the means test is an essential part of this process. You can trust an Arizona bankruptcy lawyer to explain bankruptcy laws, how they relate to your income, and the ways that the means test will affect your case. Your attorney will also describe the proceedings for a Chapter 13 case. You may be required to file for debt reorganization under these rules, but you might also consider Chapter 13 instead of Chapter 7 regardless of eligibility. With Chapter 13, no liquidation could put your assets at risk of being sold.

With regards to the steps in a bankruptcy case, your lawyer will handle such important tasks as:

  • Helping you gather and organize required financial paperwork on your income, expenses, assets, and debts;
  • Preparing the bankruptcy petition, along with all schedules;
  • Assisting with exemptions to protect your property from being sold;
  • Participating in the meeting with creditors, where you must be present to answer questions about your petition; and,
  • Obtaining the final discharge order from the court, ending your case and wiping out qualifying debt.

Plus, it is also critical to have legal representation in Chapter 13 cases. Your bankruptcy attorney can assist with filing a new case, as well as convert your matter from Chapter 7 to Chapter 13. Because of the importance of the debt repayment plan, it is smart to have advice and counsel for developing a solid strategy.

Talk to an Arizona Chapter 7 Bankruptcy Lawyer About the Means Test

While an overview is useful, many additional details are important to know about the means test for bankruptcy in Arizona. For personalized advice on your situation, please contact DebtBusters right away. You can set up a free consultation at our offices in Scottsdale, AZ by calling (866) 223-4395 or going online. Our Chapter 7 attorneys can explain more about eligibility after learning more about your circumstances.

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