The means test is a financial assessment used to determine if you’re eligible for Chapter 7 bankruptcy. The goal? To ensure that people who can afford to repay some of their debts don’t use Chapter 7 bankruptcy to wipe out all their debts unfairly. This step generally follows a two-step process.
Step 1: Comparing your income to Maryland’s median
You will need to calculate your average monthly income for the six months before filing for bankruptcy. This includes most types of income, such as:
- Wages and salaries
- Business income
- Rental income
- Interest and dividends
- Unemployment benefits
- Regular contributions to household expenses from others
After calculating your average monthly income, you’ll need to compare this figure with the median income in Maryland for a household of similar size to yours. Should your income fall below this median threshold, it means you are eligible to proceed with filing for Chapter 7 bankruptcy.
Step 2: Calculating your disposable income
Even if your income exceeds the state’s median, you might still qualify for Chapter 7. In this case, you will need to calculate your disposable income. This process involves subtracting your allowed expenses from your total income to determine how much money you have available each month for debt payments.
These allowed expenses typically include basic living costs like rent, food, medical bills and travel expenses. You can also take off some debt payments, like house or car loans. If the money you have left after these subtractions is below a certain amount, you might still be able to file for Chapter 7 bankruptcy.
Are there any exemptions?
Some people may qualify for an exemption from the means test. This includes individuals who:
- Owe primarily business-related debts
- Are a disabled veteran with debts incurred during active duty or homeland defense activities
- Serve in the National Guard or reserve component of the Armed Forces
While these may allow you to skip the means test when filing, they don’t automatically qualify you for Chapter 7 bankruptcy. The court will still need to review your entire financial situation.
This is just one part of the process
The means test is an important starting point, but bankruptcy involves many more steps. Consult with an attorney who can provide a comprehensive view of your options and obligations.
