Bankruptcy Means Test

The simplest way to define a means test is as an official assessment of and investigation into the financial circumstances of an individual. Means tests are used in the realm of bankruptcy to determine eligibility for a Chapter 7 filing in Arizona. But what exactly does a means test entail, and how does it affect your filing for bankruptcy? Our Phoenix bankruptcy lawyers can help answer these questions, among others.

What Is a Means Test?

The means test is a system of assessment to help prevent the abuse of Chapter 7 bankruptcy and regulate its use. Individuals seeking to file for Chapter 7 are required by federal law to submit their financial information for investigation before their filing process can begin. Once the information is received, your average monthly income over the past six months is weighed against the median income for those in your region.

If you fall below the median income, you will likely qualify for a Chapter 7 filing. If you are at or above our area’s median income, you will generally be directed to pursue a Chapter 13 bankruptcy filing, which will require you to pay any debts not absolved within a given timeframe.

Why Is This Test Necessary?

Chapter 7 was created to assist those who truly could not pay their debts, but later was overused by those who had the means to settle without aid. In 2005, legislation was passed and new bankruptcy laws tightened the eligibility requirements around Chapter 7 qualification, and the means test was one of the measures taken. This ensures those unable to pay their debts are given the assistance they need, while those who need a different level of assistance are cared for, as well.

Benefits of Chapter 7 Bankruptcy

Many hope to receive Chapter 7 over Chapter 13 because of its increased capacity for change. When filing for Chapter 7 in Arizona, the debtor can receive an entirely fresh start with the majority of his or her debts discharged. He or she may have some assets liquidated in the process, but by the end of the 3 to 6-month bankruptcy process, he or she will be entirely debt-free.

Chapter 7 also imposes no limitations on the amount of debt that can be handled, and the discharging of existing debt is handled quickly and efficiently. Moreover, with all payments made, the debtor emerges free of future payments or obligations and can retain all of his or her earnings. A Phoenix bankruptcy lawyer can help you determine whether or not filing for Chapter 7 is best for your financial situation.

Passing the Means Test

Upon successfully passing the means test, you are qualified to file under Chapter 7 for bankruptcy. Once this is determined, it is time to begin assessing your assets and costs. Chapter 7, also known as liquidation or straight bankruptcy, often requires some of your assets be sold to repay your debts; however, there are ways to protect the assets you hold most dear. Every state offers some level of asset exemption, and working with a bankruptcy lawyer in Phoenix, AZ could get your vehicle and your home removed from harm’s way. When embarking on this path, check that the things you value most are safe. Relying on a knowledgeable advocate is the best way to do so.

What Happens if I Don’t Pass?

If you do not pass, it doesn’t mean you are unable to file for bankruptcy. A skilled Phoenix bankruptcy attorney can work with you to help set up a Chapter 13 claim in Arizona and still get your assets under control. Alternatively, there are options outside of filing for bankruptcy you might consider if you are financially capable of paying back your debts, such as debt consolidation. If you don’t qualify for Chapter 7 and are reluctant to pursue Chapter 13, talk with your banker or a financial adviser to learn what alternatives may benefit you.

Contact us today if you think Chapter 7 or Chapter 13 might be right for you.