When you find yourself caught in a financial storm, you might consider Chapter 7 bankruptcy as a way out. But it is important to remember that not everyone can take this path without first passing the income-based means test. But what does this mean in Chapter 7 bankruptcy?
The income-based means test
The income-based means test is a significant threshold in determining eligibility for Chapter 7 bankruptcy. It is essentially a financial measuring stick that evaluates whether your income aligns with the requirements. Your average monthly income for the six months preceding the bankruptcy filing is compared to the median income in your state.
You may be eligible if you meet one of these three distinct avenues.
- If you are in the exempt category, there’s no need to worry about the means test
- If your income fits within the income limits
- If specific essential expenses offset your significant income
If your income exceeds Georgia’s median, you must do the means test to determine whether you can repay some of your unsecured debts through Chapter 13 bankruptcy.
Calculating disposable income
You must subtract various allowable expenses and deductions to arrive at your disposable income. Examples may include, but is not limited to:
- Housing costs
- Transportation expenses
- Food and household supplies
- Health care costs
- Childcare and education
- Support payments
- Charitable contributions
- Necessary work expenses
- Court-ordered payments
- Retirement contributions
Assessing these will ascertain if you have enough disposable income to potentially pay off a portion of your debts through a Chapter 13 repayment plan.
The income-based means test is a pivotal gatekeeper to accessing Chapter 7 bankruptcy. It scrutinizes your income against state medians and disposable income calculations. By understanding the meaning behind this test, you’ll be able to make informed decisions before jumping into a big financial decision.