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How does the bankruptcy “means test” work?

On Behalf of | Nov 23, 2015 | Chapter 7 | 0 comments

If you are a reader of our blog posts then you likely already know that not only are there two common forms of bankruptcy available to individuals (Chapter 7 and Chapter 13). You may also know that your choice of which form to use may not always be completely within your control; one of the decision factors is whether you qualify for Chapter 7 under what is referred to as the “means test.”

The purpose of the means test is to steer into Chapter 13 debtors who make enough income to warrant the use of a payment plan instead of liquidation. Payment plans are generally better for creditors, because usually payment plans allow creditors to recoup more than under a liquidation.

The first step in the mean’s test for Kentucky debtors is to compare the debtor’s average monthly income with the state’s median income. Income includes wages and salary, as well as monies available from interest, dividends, rent, alimony, child support, workers’ compensation and unemployment benefits, retirement income, and more. If the debtor’s total income does not rise to the level of the state median income, then he or she will likely qualify to use Chapter 7.

If the debtor’s income is greater than the Kentucky median, the bankruptcy trustee deducts any allowable expenses to determine if doing so will reduce the amount of disposable income below the level where not enough is left to effectively apply payment plan.

The means may sound simple in concept, but calculating it can be subject to a variety of exceptions and qualifications; indeed, in some circumstances it may be possible for the debtor to avoid going through it at all.

If you are considering Chapter 7 bankruptcy and want to know whether you will qualify under the means test, a bankruptcy attorney can help you to identify income and assets that the bankruptcy trustee will likely factor into the test to see how it may affect you.