People who consider personal bankruptcy when they are experiencing financial difficulties might decide that the best solution is to seek relief from the courts. An experienced legal professional can help navigate what can be a confusing situation, but in short, bankruptcy courts have two main options for those seeking personal bankruptcy relief.
Chapter 7 erases most, if not all, of a person's debt and gives them a fresh start. Chapter 13 is a repayment plan that if successful, also results in a new financial beginning. The type of bankruptcy that can be filed is determined by something called the Means Test.
The Means Test has two portions. The first part consists of a thorough evaluation of a person's total income. The court will look at your average monthly income for the previous six months. The income should include all streams, with the exception of tax refunds, Social Security benefits and Temporary Assistance for Needy Families. If the income amount is less than the state median family income. then the person can file a Chapter 7 case and ask that all debts be erased. If a person's income is higher than the threshold, he or she moves on to the second part of the test.
The second part is an examination of all allowable expenses. These include rent or mortgage on the primary residence, a car payment for the primary vehicle, utility expenses, student loans, alimony, child support, expenses directly tied to the upkeep of the primary residence and vehicle such as insurance and other financial obligations. Once all of the allowable expenses are tallied, the court will determine whether a person qualifies for a Chapter 7 or if Chapter 13 is the only option for relief. If there are extenuating circumstances, e.g., a person is facing a financial change that will lower his income, then petitioning the court and explaining the circumstances can make a difference in determining which type of personal bankruptcy to file.
And no, there's no studying necessary for the Means Test.
Source: FindLaw, "The bankruptcy means test," accessed June 24, 2016