Chapter 7 Means Test

Bankruptcy can be a very helpful legal process for those that find themselves in over their head with debt, but like all systems there are rules and tests that guide the possibilities for a possible petitioner for bankruptcy protections. These rules and tests are ones that your Montgomery, Selma, And Central Alabama bankruptcy attorneys at The Sellers Law Firm are knowledgeable about and experienced with to help guide you through the system. One of the first things that must be determined is what decisions you can make under bankruptcy protection and what decisions are forced on you under the bankruptcy laws.

In some cases, you have an option of choice under bankruptcy and in other situations you have requirements placed upon you by the bankruptcy law and rules. Some examples of options that you can make include whether to surrender security under secured debt such as a car with a loan against it or a house that has a mortgage. Examples of requirements that are forced on you is that if you elect to file for bankruptcy protections then you cannot pick and choose which debts are listed in the bankruptcy petition, and you must provide accurate income information in the petition for bankruptcy protections. By and large there are three major “tests” that a petitioner must pass when considering between Chapter 7 and Chapter 13 bankruptcy protections. We call these requirements “tests” because if you do not pass them then the options are moved from the choice category to the requirement category. The three tests are the good faith test, equity test, and the subject of this article which is the means test.

The failure to pass the means test could take the decision about filing a Chapter 7 out of your hands and require you to file a Chapter 13 and to pay some of your unsecured debt under a reorganization plan. In this requirement under the Bankruptcy Laws your Montgomery, Selma, and Central Alabama Bankruptcy attorneys at The Sellers Law Firm can and will advise you as to the best route to take when you are considering bankruptcy protections.

The means test is meant to separate high wage earners from lower earners and require that high wage earners pay some or all their debt to unsecured creditors. This means that the decision to file a Chapter 7 may be taken away from someone that fails the means test. The first means test takes a petitioner’s income, from allowable sources, for the last six months prior to filing for bankruptcy protection and calculates an annual gross income and compares that amount against the mean income for the State of Alabama and household size. The allowable income question means that only some income may be used for this calculation. Allowable income includes wages, veterans benefits not associated with disability, food stamps, rental income and even alimony and child support. Exempt income included social security income and veteran disability benefits if the debt was incurred during service when the disability happened. The amounts that are used to determine over and under means on this first examination are published based upon census data by state and size of household. The current threshold amount in Alabama for a household of one is $48,544 in the last half of 2020. This means that if your income on this first examination is below $48,544 then you pass the means test and may file a Chapter 7 or Chapter 13 remember that the size of your household will impact the threshold amount. If your calculated income is above this amount, then there is a secondary examination that allows you to take certain deductions to see if you still pass or fail the means test.

The second examination, which is only required if you exceed the median income on the first test allows a bankruptcy petitioner to deduct certain expenses at certain limited amounts to see if there is any disposable income to pay the unsecured creditors in a Chapter 13. The deductions include, but are not limited to, the cost of health, disability or term life insurance, home mortgage payments, car loan payments, childcare expenses, taxes, charitable contributions, and educational expenses. If after performing these calculations your results, or disposable income, is still positive then you must make payments to unsecured creditors in a Chapter 13; if your results are a negative number then you can chose between a Chapter 13 or Chapter 7 as other elements of your situation are considered. Of course, the attorneys of The Sellers Law Firm can advise you and guide you through these issues.

At The Sellers Law Firm, we can advise you on your available options in a Chapter 7 case. We have four offices in Central Alabama which are located in Montgomery, Selma, Greenville, and Troy. All consultations are always free, and we can usually meet with you within 24 hours. You can call or text us at 334-LAWYERS (529-9377), and our phone lines are answered 24 hours a day! You can also use the Contact Form on our website or you may email us at bsellers@sellerslawfirm.com. Remember that doing nothing changes nothing so act today!