If you’re hoping to file Chapter 7 bankruptcy, you’ll need to take a ‘means test’ to determine if your income is low enough. This formula is designed to keep high earners from filing for bankruptcy when it’s not necessary. People who ‘fail’ the means test can use Chapter 13 bankruptcy to repay a portion of their debts but will be unable to use Chapter 7.
While it might seem like Chapter 7 bankruptcy is only for those without money, this isn’t exactly true. People who earn a significant income but have many expenses, such as a high mortgage and taxes, may still be able to pass a means test. The purpose of this test is to determine whether a person has enough disposable income to repay their debts.
How Does a Means Test Work?
The means test has two parts, both of which look at your disposable income. Most likely, your bankruptcy attorney in New York will fill out the form and submit it with the rest of your paperwork.
The first part of the means test checks to see if your household income is below your state’s median income. (The median household income in New York as of January 2022 was $60,696.) This portion of the test looks at your last six months of income. If you’re below the median income, you pass the test. If you don’t pass the test, you’ll have to move onto the second part.
For this part of the test, you’ll need to gather documentation regarding your expenses over the past six months. This includes things like groceries, rent, clothing and medical care, otherwise known as ‘allowable expenses.’ What’s left over is considered disposable income that can be used to pay down your debts.
It’s important to be thorough and accurate with your expenses, because if you don’t, your case may be thrown out. So, be prepared to be honest and forthright about where you are spending your money. Fortunately, your New York bankruptcy attorney will work with you to make sure that all expenses are documented.
What Happens if You Pass the Means Test?
As long as you pass the means test, either in Step 1 or Step 2, you can proceed and file for bankruptcy. Chapter 7 bankruptcy forgives most of your unsecured debt like credit cards and medical bills. Make sure you understand the difference between Chapter 7 and Chapter 13 bankruptcy so that you can make the best decision.
Even though Chapter 13 bankruptcy doesn’t erase all of your debts, it can be the better option if you need time to catch up on your debts while keeping your home. With Chapter 13 bankruptcy, you’ll pay a portion of your debts back over a period of 3-5 years.
What Happens if You Fail the Means Test?
Sometimes people fail the means test, and there is no way to appeal it. If you fail, you fail. But rest assured that you do have options – you are not automatically stuck.
The first option you have is to file for Chapter 13 bankruptcy. Yes, you will have to repay your debts, but the payments will be based on your income and what you can afford each month. Plus, you’ll get to keep your home and pay off your debts in 5 years or less.
If you don’t want to file Chapter 13 bankruptcy, you can wait six months and retake the means test. We only recommend taking it again if you feel that your situation will meet the threshold. Do not take the test if your situation is the same in six months, as you’ll get the same results.
Next Steps to Filing Bankruptcy
Obviously, the best scenario is that you pass the means test with flying colors and are able to move forward with Chapter 7 bankruptcy. Keep in mind that you’ll need to work with an experienced bankruptcy attorney in New York and go through bankruptcy counseling.
It’s also important to know that bankruptcy will affect your credit score. Chapter 7 bankruptcy stays on your report for 10 years, while Chapter 13 stays on for seven years. How much your credit score is impacted depends on your current score. If your score is 700 or above, expect it to decrease around 200 points. If it’s lower, say around 680 or less, you can lose around 130 to 150 points.
With this in mind, you’ll also need a plan to repair your credit. Fortunately, you will have plenty of time to work on this while you resolve your debts. One day in the future, you’ll be able to look back and feel good that you had the opportunity to rebuild your financial life.
To discuss filing for Chapter 7 (or Chapter 13) bankruptcy, contact the Law Office of William Waldner. We’ll look at your case, go over all of your options and help you pass the means test.