The Bankruptcy Means Test: Qualifying For Chapter 7 Bankruptcy

How To Calculate Your Chapter 7 Means Test In Hawaii

If you’ve decided to file for bankruptcy, one of the first decisions you’ll need to make is whether to file for Chapter 7 or Chapter 13. These are the two most common types of bankruptcy, but have different methods and approaches. With a Chapter 7 bankruptcy, some of your assets may be sold to pay off your creditors. Any remaining eligible debt will be discharged, or eliminated. Chapter 13 bankruptcy restructures your debt into a 3-5 year payment plan, with any remaining balances discharged after you’ve made your payments.

How To Qualify for Chapter 7 Bankruptcy, Even If You Have a High Income

Not everyone has the option to choose between Chapter 7 and Chapter 13 bankruptcy. You’ll need to meet specific requirements. You can find out whether you qualify for Chapter 7 bankruptcy by taking a “means test,” which is simply a calculation of your income and expenses. If your income is too high to pass the means test, you’ll need to look at Chapter 13 bankruptcy. Chapter 7 isn’t necessarily just for low-income filers, however. If you earn a higher income but have a large family, high mortgage, or other expenses, you may qualify for Chapter 7 bankruptcy. It’s also important to know that business debt is calculated differently from consumer debt and that some veterans and military personnel do not need to pass the means test in order to qualify.

How Does The Chapter 7 Means Test Work In Hawaii & How To Calculate It

The Chapter 7 bankruptcy test is designed to determine which debtors have sufficient income to repay their creditors, and which do not. If you do not have enough income to pay off your debts, you’ll pass the test and qualify for Chapter 7 bankruptcy. The two basic steps of the means test are:

Determine Your Monthly Income

• You’ll need to find out whether your monthly income is more or less than your state’s median income for a family of your size. You’ll take your gross income from the previous six calendar months before your filing, and multiply it by two. The most recent data for Hawaii at this time shows the median income at just over $88,000 annually. Your Hawaii bankruptcy attorney can help you find out the most current median income and assist you in calculating whether you pass the means test for Chapter 7 bankruptcy.

If your income is below the median income, you pass the means test and can file for Chapter 7 bankruptcy. If you make more than the median income, other factors may come into play that still enable you to pass the means test.

Deduct Specific Monthly Expenses

If your income is above the median amount, subtract your allowed monthly expenses from your current income in order to determine your monthly disposable income. Allowed expenses include your mortgage or rent as well as the cost of food, reasonable transportation, and basic living. What amount you can subtract for these expenses will vary based on where you live. Consulting with an experienced bankruptcy law firm can simplify the process of filing for bankruptcy by assisting with the calculations, helping you determine which type of bankruptcy is best for you, and handling some of the paperwork on your behalf. The higher your disposable income, the less likely it is that you will qualify for Chapter 7 bankruptcy.

Can I File For Chapter 7 Bankruptcy With Business Debt?

Which type of debt you have will affect your ability to file for Chapter 7 bankruptcy. If you are filing for bankruptcy due to business debt, you may not need to pass the means test. However, most individuals who have business debt also have other types of debt, known as consumer debt. This usually includes credit cards and other loans for consumer goods. If you have primarily consumer debt, you will need to pass the means test in order to file Chapter 7.

How To Qualify For Chapter 13 Bankruptcy Even If You Fail the Chapter 7 Means Test

If your income is too high and/or your expenses are too low to pass the means test, you won’t qualify for Chapter 7, but may have the option to file for a Chapter 13 bankruptcy. This type of bankruptcy protects all of your assets while restructuring your debt into affordable monthly payments based on your disposable income. The advantage of Chapter 13 is that your bankruptcy will remain on your credit for a shorter period of time and you’ll be able to repay some of what is owed to your creditors. In some cases, Chapter 13 bankruptcy can be used strategically to avoid foreclosure, and may be a good option for repaying debts that don’t qualify for Chapter 7, such as taxes.

Chapter 7 Bankruptcy: Why Passing The Means Test Isn’t a Guarantee

Just because you’ve passed the means test does not mean you automatically qualify for Chapter 7 bankruptcy. The court will need to consider your income and expenses and may choose to convert your filing to a Chapter 13 bankruptcy. Additionally, just because you qualify for a Chapter 7 bankruptcy does not mean it is necessarily the best option for you. There are many other considerations and factors to discuss with your bankruptcy lawyer as you prepare to file for bankruptcy.

Obtain Legal Advice & Guidance From Hawaii’s Trusted Bankruptcy Attorneys

Bankruptcy law is complex. If you’re dealing with overwhelming debt and aren’t sure what steps to take next, call Blake Goodman, PC, Attorney for trusted guidance and legal advice. Our team is the leading provider of bankruptcy law services in Hawaii and can help you understand the process of filing for bankruptcy, how the laws apply to your situation, and which type of bankruptcy is best for you. We will provide experienced guidance and representation throughout the bankruptcy process. Contact us today to schedule your free, confidential consultation! We can help!