How do courts determine who is and is not eligible to receive a bankruptcy discharge under Chapter 7? The answer is the “means test,” a simple way of determining whether one’s income level is low enough to qualify for a discharge. People who do not pass the means test may still be eligible to file for Chapter 13 bankruptcy and arrange a repayment plan, but will not be eligible to eliminate their debts under Chapter 7.
You do not necessarily have to be completely penniless to qualify for Chapter 7 bankruptcy. Even if you earn a significant monthly income, you could still qualify if your expanses and debts vastly outweigh that income.
How the Chapter 7 means test works
The means test exists to limit the ability to receive a Chapter 7 bankruptcy discharge to only those who need it the most. Through the means test, you deduct certain monthly expenses from your current monthly income, which is determined by the average income you earned over the previous six months. The resulting figure is your “disposable income.” The lower your disposable income, the better chance you’ll have at securing a Chapter 7 bankruptcy discharge.
The only people who file for bankruptcy who need to take the means test are those who have mostly consumer debts versus business debts. When taking the means test, you will first determine if your income is higher or lower than the median figure in your area.
If you earn less than the median income, then the test is over—you may file for Chapter 7 bankruptcy. If you earn more than the median, however, you may not be eligible to file for Chapter 7 if you would have enough disposable income to repay some of your debts. If your level of disposable income reaches a certain amount, you will fail the means test and may need to file for Chapter 13 bankruptcy instead.
The target median income level for your specific case depends on the size of your household and where you live.
Passing and not passing the means test
Even if you pass the means test, you still may need to determine if filing for bankruptcy is the right decision for you. Passing the test simply means that you are legally able to receive a discharge of your debts. You should first consider all the alternatives available to help you determine what the best path forward is for you.
If you do not pass the Chapter 7 means test and still wish to file for bankruptcy, Chapter 13 is an option. Under Chapter 13, you can pay off at least some of your debts via a court-sanctioned repayment plan, which typically lasts between three and five years.
To learn more about bankruptcy and its alternatives, consult a trusted U.S. Virgin Islands financial services attorney.
Tom Bolt is Managing Attorney at BoltNagi, a respected and established financial services law firm serving individuals, businesses and organizations throughout the U.S. Virgin Islands.