You can file for bankruptcy if your debts are unmanageable and there is no possibility of a solution soon. Bankruptcy enables you to manage your debts while providing a fresh financial start. But you can file for bankruptcy, depending on your debt and income. Chapter 7 is the most popular because it discharges most of your debts. To qualify, you must first pass the means test. The test aims to rule out debtors who can pay their obligations in whole or partly through a repayment plan or restructured loans.
A means test compares your income over the previous six months against your debts. If you have adequate money to pay off your obligations gradually, the bankruptcy court will unlikely let you petition for Chapter 7. It is beneficial to tread this difficult path with the assistance of an experienced business and estate attorney for guidance, support, and legal counsel. At the Los Angeles Business & Real Estate Law Firm, we make sure that our clients understand their alternatives so that they can make informed judgments. We will also fight alongside you for the best possible conclusion in your case.
Understanding The Need for a Means Test
Filing for bankruptcy can be essential if you are drowning in debt and have no clear plan for repaying it. Bankruptcy allows you to manage and pay off your debts while providing a fresh start. However, for the court to allow you to file for bankruptcy, you must first qualify. The good news is that you have several options depending on your financial condition and the amount you owe. Chapter 7 bankruptcy permits you to pay off your debts with available resources. It can discharge some of your debts before using your income and assets to repay your remaining debts. But you must first pass the means test to qualify for Chapter 7.
As a result, passing a means test is required when filing for Chapter 7. The test enables the court to assess whether you meet all of the standards for debt relief and have part of your debts discharged. You cannot discharge your debts under Chapter 7 if you have adequate income and assets to pay off your debts. Your attorney can advise you to file for Chapter 13 in that case. Chapter 13 enables you to develop a repayment schedule that will enable you to pay off your debts in 3 to 5 years. However, if you have limited income and assets but are swamped by bills, the court can discharge some of your debts and utilize your assets and income to clear nondischargeable debts.
The means test is only passed by some who take it. You could fail a means test if you do not give all the facts that best reflect your financial position. You could also fail if your income is insufficient to satisfy your debt through a debt payment plan. Keep in mind that Chapter 7 is mostly about debt relief. If you fail to qualify for debt relief, you must declare another bankruptcy type, like Chapter 13. That is why you need the assistance and support of a professional to file the right bankruptcy and achieve the debt relief you require to restart your life.
It helps to have the appropriate intentions when filing for bankruptcy and to communicate those ideas with your attorney. Your attorney will assess your circumstances and advise you on the best course of action to obtain a better outcome. Although filing for bankruptcy provides various benefits, there are certain drawbacks to consider to make the best decision. It is advisable to consider other options first and file for bankruptcy if all other options to pay off your obligations have failed. Your attorney will also ensure you understand how Chapter 7 works and its benefits and drawbacks so you can make an informed decision.
Passing a Means Test
You must demonstrate that your earnings are lower than the national median to pass this test. Your income consists of your wage (if you work), business output, and what you can get from your disposable assets. Your attorney will advise you to file for Chapter 13 bankruptcy if you have enough income to pay off some of your debts and enough assets to earn enough money to pay off your debts. But if you are unemployed, do not own a business, and have only a few disposable assets, you could be eligible for Chapter 7. Remember that bankruptcy ought to be your last resort for debt relief.
You could be eligible for Chapter 7 debt relief if you cannot meet all your obligations for seven to ten years or live from one paycheck to another. You do not have to perform a means test if your income has been less than the state’s median since November 2016; you can be immediately eligible for Chapter 7 bankruptcy. But you must pass a means test before filing for Chapter 7 if you earn more or come from a higher-income family. These restrictions are in place to keep higher-income people from taking advantage of the system by seeking debt relief when they have the financial resources to settle their bills.
Typically, the means test compares your family’s income to a similar one. It makes it simple for persons from different households, regardless of family size, to qualify for Chapter 7. Consequently, you can pass the means test whether you are single or part of a family of five or seven. The court will compare the information you give to the income of a similar-sized household once you state the size of your family and its income. To qualify for Chapter 7, the court also considers specific facts regarding your financial condition, including other financial responsibilities.
You must include the following when calculating your means test results:
- Your monthly salary
- Rental income
- Interests and dividends
- Business income
- Retirement benefits
- Pension
- Unemployment benefits
- Any financial assistance you receive from others to post your household income
Your attorney can advise you to delay filing for bankruptcy under the following circumstances:
- If you are struggling to satisfy your disposable income requirement to pass Chapter 7 means test
- You anticipate a loss of income or earnings
You can delay filing for bankruptcy for a few more months. After a few months of receiving a lower income, your monthly wages will fall below the median, allowing you to file for Chapter 7.
On the other hand, a means test for disposable income solely applies to personal loans and not corporate debts. A means test is not required if most of your obligations are business-related. But you can be eligible for Chapter 7 regardless of your debts or disposable income.
When you run a business, you accumulate most of your business debts while attempting to maximize revenues. Thus, any business expenses incurred on your credit card, including company travel and purchases, are considered commercial obligations. Personal debts include vehicle loans and mortgages. You can qualify for Chapter 7 bankruptcy by passing a means test if you have more personal debts than business debts.
Factors That Could Affect Your Means Test Results
Your income is the most crucial element influencing your means test results. Remember that your monthly discretionary income determines your results. You will fail the means test if you receive enough income to repay your obligations through a repayment plan. But you can be eligible for debt relief and be permitted to apply for Chapter 7 if your income is insufficient to meet your urgent necessities.
A lower income will also impact the outcome of your means test. The bankruptcy court will evaluate your current earnings to establish your eligibility for Chapter 7 if you have recently been demoted, have had your income reduced, or have been fired from work entirely. The court can also evaluate your earning prospects, like if you can take on another job to supplement your income. If that option is unavailable, you can pass the means test and file for Chapter 7.
The bankruptcy court will consider your medical status as well. Remember that if you have a medical problem, it can limit your earning potential, resulting in a lower income. You can also pay for your medical bills and other commitments. That can make it challenging to manage your consumer debts.
If you are going through a divorce, it can impact your means test results. Most couples are not eligible for Chapter 7 because their combined income does not satisfy the requirements of a means test. Your income after divorce can be less than you need to pay off your debts. You can pass the means test and receive debt relief in that instance.
If you are in school and are paying for your tuition, the bankruptcy court will consider your school expenses and student loans before ruling. You can pass the means test if you spend a significant portion of your income on school-related costs.
If you are caring for an elderly or dependent person, you can pass the means test. Caring for a dependent, whether a child or an adult, can substantially influence your income. It could leave you exhausted and unable to work to your full ability. Furthermore, you may be devoting a significant portion of your salary to meeting the requirements of the dependent individual. You can pass the means test if you require debt relief to manage your debts.
You could also pass the means test if you pay child support and/or alimony. Payments for child support and spousal support are usually not cheap. In most circumstances, you will pay your partner a share of your income. It means that you are required to pay if you make more money. That could leave you bankrupt and unable to repay your bills. But if you receive spousal and/or child support, they qualify as an increase in your income. That can have an impact on your capacity to pass the means test.
Some United States military members are exempt from meeting the requirements of a means test to apply for Chapter 7. You are not required to take the test if you have this privilege.
What Next If You Pass The Means Test
If you are deeply in debt and would benefit from debt relief to manage your enormous debts, passing a means test is a win. A “pass” indicates that you demonstrated your inability to repay your debts with your income in court. A means test is more likely to be successful if your income is low or you have more financial obligations. If you pass the test, the bankruptcy court will allow you to file for Chapter 7.
It will appoint a bankruptcy trustee to assist you with your debts, and the court will discharge some of them. The trustee’s job would be to liquidate your assets and utilize the money to pay off your non-dischargeable obligation. Except for exempt assets, the trustee has the authority to sell all your other assets.
What Happens Next If You Fail The Means Test?
If you are deeply in debt and want to seek debt relief through Chapter 7, failing a means test will deprive you of that opportunity. Failure to pass a means test could signify a variety of things. It could indicate that you did not verify your eligibility for debt relief or that you earn enough to pay off your debts. You should consult with an attorney to devise a strategy that will result in a more favorable result for your situation if you fail a means test.
For example, your attorney can advise you to apply for a different bankruptcy type, like Chapter 13. However, you must have adequate income and assets to pay off your obligations over the next 3 to 5 years. The bankruptcy court will appoint a bankruptcy trustee to assist you in developing a debt payment plan. It will include your monthly income and how much you can devote to debt repayment. Your bankruptcy trustee will also liquidate some of your assets to pay off some of your debts. You will pay off the remaining obligations over the specified period per the repayment plan.
Preparing to Take the Means Test
Your first step in preparing to take the means test is to calculate your monthly earnings for the six months preceding your bankruptcy filing. The test will include whatever you earn or have earned in the last six months, including commissions, tips, overtime pay, and bonuses. You should also mention any royalties you have received or will receive for the continued use of an asset you own.
Consider workers’ compensation as well. If you receive workers’ compensation, it will impact your entire income. But workers’ compensation only covers one-third of your salary. As a result, relying just on workers’ compensation will not suffice to cover your bills and debts. In that instance, you could pass the means test.
Consider any property income you have received, are, or will receive. Be as truthful as possible to lessen the possibility of being disqualified from filing for bankruptcy. If you own a property or rent or lease it to someone, the earnings you receive are an addition to your income. You will also consider any child and/or spousal support you receive from your ex-partner if you are divorced.
If your wages exceed the median, you will need to produce further proof to pass the test. Earning more than the median salary can cause you to fail the means test. But you could pass the means test if you can demonstrate that a significant portion of your income is spent on required expenses, like paying child support, alimony, or medical bills.
You can determine your eligibility for Chapter 7 bankruptcy with the assistance of your attorney. Your lawyer will investigate your financial status and advise you on your alternatives. Your attorney will walk you through the process if you need to take the means test. They will also ensure that you file for bankruptcy after passing the test.
Find a Reliable Business and Real Estate Attorney Near Me
Are you in debt and want to declare Chapter 7 bankruptcy in Los Angeles?
To qualify, you must first pass the means test. If you cannot handle your debt with your existing income, Chapter 7 can be your best option. It pays off some of your debts and covers the remainder by liquidating your assets. To pass the means test, you must show that your income is less than the state median income or that your responsibilities exceed your income. Without adequate assistance, the legal processes surrounding taking and passing a means test and filing for bankruptcy can be intimidating. That is why we at the Los Angeles Business & Real Estate Law Firm offer our assistance and support. We want to make the legal process easier for you, make sure you make the correct decisions and fight alongside you for a better end. Contact us at 310-796-7794 to learn more about us.
