If you have fallen significantly behind on your debts and don’t see a way to pay them off, you’re likely thinking about filing for bankruptcy. This is often an ideal solution for many, as it allows them a fresh financial start and can help them get back on their feet.
The two most common types of bankruptcy are Chapter 7 and Chapter 13. Chapter 13 does not discharge debt, but instead restructures it in a way that’s easier for the debtor to pay off. Chapter 7 bankruptcy, on the other hand, will discharge most debts. It’s for this reason that when a person wants to file for bankruptcy, they often want to file for Chapter 7. In order to do so, though, you first have to pass the bankruptcy means test.
The Bankruptcy Means Test
The bankruptcy means test is a test to determine the financial means of a debtor filing for Chapter 7 bankruptcy. The purpose of the test is to prevent high-income earners from declaring Chapter 7 bankruptcy when they are capable of paying off their debts. When the test finds a debtor has the financial means to pay back creditors, they are often unable to file for Chapter 7 bankruptcy.
The means test will deduct specific monthly expenses from your current monthly income in order to determine your disposable income. The test will take six month’s worth of your average income into consideration when determining your average disposable income.
The means test does consider your last several months’ worth of income when determining if you’re eligible for Chapter 7 bankruptcy. However, it will also take certain factors into consideration. For example, if you had a great job for four months but are now unemployed, the test will consider your new situation. The test then compares your income with that of other households of the same size in the state of Florida.
In most cases, the higher a person’s disposable income is, the less likely it is that they will pass the means test. If they don’t, they are unable to file for Chapter 7 bankruptcy. However, there are steps you can take if you want to file for Chapter 7, but feel as though you won’t pass the means test.
Tips to Help You Pass the Means Test
It’s true that high income-earners are going to have a much more difficult time passing the means test than those with lower incomes. This doesn’t mean, however, that those with higher incomes can never file for Chapter 7 bankruptcy. There are steps you can take to increase your chances of passing the means test and filing for the type of bankruptcy you prefer.
The first step you can take is to increase your retirement contributions to the maximum amount allowed by the IRS. While taking the means test, you are allowed to deduct IRS-approved retirement contributions from your income. When these amounts are deducted, you could give yourself a much better chance of passing the means test.
Another IRS-approved deduction when taking the means test is charitable contributions. Due to this, when facing bankruptcy, you can increase the amount you give to charity and have this amount deducted from your income when taking the means test.
Of course, tax obligations are also allowed by the IRS and are deducted from a person’s monthly income during the means test. This one seems like the most obvious deduction for debtors but too often, people facing bankruptcy overlook the taxes they are required to pay. They don’t include them in their monthly expenses and don’t pass the means test, only to later regret that they didn’t include them in the test.
Lastly, if you want to file for bankruptcy and are still paying off a car loan, keep your car when filing. The means test allows you to deduct your monthly car loan payments from your monthly income. While it may make sense for you to unload these payments by getting rid of your car, keeping the vehicle and the loan that comes with it is often very helpful when filing for bankruptcy.
Passing the Bankruptcy Means Test
If you pass the bankruptcy means test, it means you are eligible to file for Chapter 7 bankruptcy. This will discharge most of your unsecured debts such as medical bills and credit card debt. If you’re considering this route, it’s best to speak to an attorney who can help you make the decision.
Chapter 7, while it discharges most of the debt, also won’t allow you to keep many of your assets. This is an area of concern particularly for those with high incomes that have likely accumulated a number of assets. An attorney can help anyone filing for bankruptcy determine which type of bankruptcy is right for them.
Failing the Bankruptcy Means Test
There is no appeal for those that fail the means test. For many, the only option is to file for Chapter 13 bankruptcy. While this doesn’t allow for a total discharge of most debts the same way Chapter 7 does, it still provides a restructuring that can make it easier to pay off debts. Under Chapter 13, debts are typically paid off within three to five years.
However, this isn’t always the only option you have after failing the means test. If your financial situation changes in six months, you can take the means test again. When your current monthly income is significantly lower than it was the first time you took the means test, you could meet the threshold for Chapter 7 debt forgiveness.
Talk to a Florida Bankruptcy Attorney to Help with Your Means Test
Taking the means test is one of the earliest and most important parts of filing for bankruptcy. It will tell you how much debt you have, and which type of bankruptcy you can file for. However, before taking it you should speak to a bankruptcy lawyer in Fort Lauderdale that fully understands everything that comes with this test.
If you’re considering bankruptcy, or have already started the process, contact the Loan Lawyers at (954) 523-HELP (4357). We’ll review everything you should do to give yourself the best possible chance of passing the means test and filing for the type of bankruptcy you prefer. We’ll ensure all paperwork is filed on time and help you secure your financial future. Don’t try to go through this lengthy process on your own. Call us today or fill out our online form for your free case evaluation.