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Understanding the Chapter 7 Bankruptcy Means Test

Posted on in Debt Collection

Chicago creditors rights attorneyIn general, bankruptcy is an outcome that most creditors want to avoid when dealing with a debtor. If you are an unsecured creditor, the debtor may use bankruptcy discharge to clear their debt while paying you little or none of what they owe. Most consumer debtors file for either Chapter 7 or Chapter 13 bankruptcy, and the chapter they choose may depend on what they qualify for.

A debtor cannot use Chapter 7 bankruptcy if the bankruptcy court deems that they are capable of repaying their debts. One way that a potential bankruptcy filer can determine whether they qualify for Chapter 7 bankruptcy is through the Chapter 7 Bankruptcy Means Test. If the debtor does not pass the test, then Chapter 13 bankruptcy may be their only option.

Chapter 7 vs. Chapter 13

Before explaining the Chapter 7 Means Test, it is helpful to understand the difference between the forms of bankruptcy from a creditor’s perspective:

  • In Chapter 7 bankruptcy, the bankruptcy trustee liquidates the filer’s non-exempt assets and repays creditors based on priority. After the payouts are finished, the filer can discharge most of their remaining unpaid debts.
  • In Chapter 13 bankruptcy, the filer enters a repayment plan that lasts three to five years. Their monthly payments are based on what they can afford from their disposable income.

According to bankruptcy law, unsecured creditors in Chapter 13 bankruptcy must receive at least the same amount of compensation as they would in Chapter 7 bankruptcy and could receive more.

The Means Test

The purpose of the Chapter 7 Bankruptcy Means Test is to determine whether or not a person has the financial resources to repay their debts. There are two steps to the means test:

  • The petitioner automatically qualifies if their median income for the last six months is lower than the average median income in their state for households of the same size.
  • If the petitioner’s income is greater than the state average, they can still qualify if their disposable income is too low for them to repay their debts.

A bankruptcy court should study the petitioner’s essential monthly expenses to determine whether there is more disposable income than is being reported. If the petitioner has enough disposable income to enter a repayment plan, they cannot file for Chapter 7 bankruptcy.

Contact a Chicago Creditors' Rights Attorney

If your debtor has filed for bankruptcy, it is important that you are part of the process to ensure that it is being conducted fairly and you receive as much compensation as possible. The Illinois creditors' rights lawyers at Walinski & Associates, P.C., work directly with clients who must deal with bankruptcy cases. Schedule a consultation by calling 312-704-0771.

 

Source:

https://www.justice.gov/ust/means-testing

Illinois Creditors Bar Association Chicago Bar Association Illinois State Bar Association
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