If you want to file for chapter 7 to get rid of all your unsecured credit card debt and personal loans, then you will need to take the means test. This test is part of the bankruptcy petition process and was implemented as part of the new bankruptcy laws of 2005. Here's how it works:
1. Calculate Your Average Gross Monthly Income
Your average gross monthly income is a tricky number, and can get you disqualified even if you are unemployed. It's because it goes back six months, so if you lost your job three months ago your average income is still greater than zero. It's stupid, but that's what happens when congress thinks bankruptcy is too easy a way to get out of debt legally.
To calculate you gross monthly income, add up ALL income from the past six months including wages earned, any unemployment, social security, spousal support, investment payments, etc. Take that total and divide it by six (to get monthly income over the past six months).
Table of Median Household Income (Census 2008)
2. Compare Your Household Income to the Median of Your State
See the image on the right for your states median household income for a given size. Click the image to see an expanded view and compare your states median to your own. If yours is greater than the median, then you should talk to Bankruptcy Lawyer before you do anything else. You will need to pass the means test to continue with a chapter 7, and there are a lot of tricks you can use to get around the means test.
If your income is over 200% of the median in your state, then you are going to have a very difficult time explaining to the bankruptcy court and trustee why a chapter 13 repayment plan wouldn't work for you. And to be honest, they're probably right. A chapter 13 payment plan is an excellent way of getting out of debt, because you still discharge most of your unsecured debts, but you don't take the same hit on your credit score as you would with a chapter 7 bankruptcy.
3. The Means Test
If your income demands that you take the means test, you will have to show that most of your debts are consumer debts, and not related to a small business. The means test is actually a bankruptcy form called 22A, and if you need to take it, it's because a "presumption of abuse" has arisen based on your income.
Click the image on the right to see the complete form that you will be required to complete. Again, you are highly encouraged to Talk to Bankruptcy Lawyer before you attempt to make any steps towards bankruptcy on your own. A competent bankruptcy attorney will help protect your rights and your assets from the creditors who will be part of your bankruptcy case.
If You Pass the Chapter 7 Means Test
Even if you did pass the means test and are allowed to file for Chapter 7 bankruptcy, it may not be the best option for you. Before filing for any Chapter under the bankruptcy law, first consider all the alternatives and the factors that make up your particular situation. Your best advice would probably come from consulting with a bankruptcy attorney.
If You Fail the Chapter 7 Means Test
Failing the means test does limit your options to Chapter 13, generally. This will require you to make monthly payments over a five year period of time following strict budget rules which are monitored by the court. Chapter 7 is usually preferred for this very reason, that is, in that it doesn't require repayments to be made. Nevertheless, Chapter 13 is still the preferred way of handling specific types of problems, particularly curing a default on a mortgage.
