When a person’s debts become so burdensome and unmanageable that they can no longer reasonably make payments and maintain their quality of life, it is easy to feel like there are no options to achieve financial solvency or get out of debt. However, this is far from the truth as there are a number of options for debtors looking to get a fresh financial start. Two of the most common choices that debtors pursue in this situation are Chapter 7 bankruptcy and Chapter 13 bankruptcy.
In seeking financial assistance or debt relief, a debtor may think that they have the option to file for either of these types of bankruptcy; however, there is a large distinction between these two forms of bankruptcy, particularly in who is allowed to apply for each. The main difference in eligibility for Chapter 7 and Chapter 13 bankruptcy is the amount of income that a debtor or their family has. Chapter 7 bankruptcy is designed to provide financial relief to debtors whose income is too low to reasonably pay off their debts in any amount of time, whereas Chapter 13 bankruptcy is designed to provide payment options and debt relief over time for debtors who have enough income to make consistent payments.
In order to identify those individuals or households who are eligible to file for Chapter 7 bankruptcy, the Chapter 7 means test has been put in place. This test measures your income and compares it against certain factors in order to determine whether your income truly is low enough to make you an applicable candidate for Chapter 7 bankruptcy. In order to pass the means test and qualify to file for Chapter 7 bankruptcy, a person must meet one of the two following criteria:
- Have a monthly income that is less than the median (average) income for a household of their size in their state
- Have a disposable income that is considered too low to adequately make payments on debts that are unsecured, like credit card debts. Disposable income is calculated by subtracting your allowed monthly expenses, such as rent, food, and bills, from your monthly income. Figuring out whether your disposable income is low enough can be extremely difficult as the amount of money you are allowed for necessary expenses varies from area to area. As such, many people turn to a bankruptcy attorney for help calculating their income levels.
The means test is not meant to make bankruptcy more confusing or difficult for debtors, but rather is in place to guide debtors to file for the form of bankruptcy that will be best for them in the long run.