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What is the bankruptcy means test, and how does it work?

On Behalf of | Jun 30, 2023 | Chapter 7 Bankruptcy

Chapter 7 bankruptcy provides financial relief by discharging most of your debts, allowing you to put your house in order without creditors breathing down your neck. However, Chapter 7 bankruptcy applicants must meet certain requirements to qualify.

For starters, you must pass the bankruptcy means test, which is a formula that determines your eligibility for Chapter 7 bankruptcy. The means test prevents people from abusing the bankruptcy system by filing for Chapter 7 when they can afford to pay back some or all of their debts. Here is how it works.

Your income will be used to assess your financial situation

The means test compares your household income to the state’s median income for your family’s size. The median household income level, which varies across jurisdictions, is informed by your household size. It also changes periodically.

To calculate your current monthly income, take your gross income earned over the six months before filing for bankruptcy and multiply it by two. Income includes wages, salaries, alimony, investment income and pension benefits. You will pass the means test and qualify for Chapter 7 if your income is lower than the state’s median income for a household your size.

However, if your household income exceeds the state’s median income, you must go through the second step in the means test. It involves deducting allowable monthly expenses from your current monthly income to determine your monthly disposable income. If it’s still too high, you will fail the means test, making you ineligible for Chapter 7 bankruptcy.

Familiarize yourself with the bankruptcy process

If you are considering filing for bankruptcy in Connecticut, it helps to understand the basics of the means test and your options if you fail. Seeking the necessary guidance can help you make informed choices that suit your situation and needs while protecting your interests.