If you've been looking at the possibility of declaring bankruptcy, you may have come across something in your reading called the bankruptcy means test. What exactly is this test, and how does it affect your ability to file for bankruptcy?
Well, the first thing you should know is that the recent bankruptcy law passed in 2005 has made things a bit more difficult for consumers. Essentially, it places some additional obstacles for people trying to declare chapter seven bankruptcy. This kind of bankruptcy, in case you're wondering, is the kind that most people think about when they hear the term bankruptcy. Chapter seven is meant to completely wipe out your debts without making any kind of commitment to repayment.
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The credit industry convinced Congress to pass this law, which tries to push people into taking chapter 13 bankruptcy instead (the kind of bankruptcy where you create a repayment plan for 3 to 5 years). One of the requirements for declaring chapter seven bankruptcy is mandatory financial management classes. Perhaps the biggest requirement is passing the means test.
The means test seeks to determine whether you can actually afford to pay your bills. You, with the help of your lawyer, have to provide extensive documentation showing all of your income and expenses to the court. This will help determine what you can actually afford. The process does require some work, and it can make things more difficult (and expensive) for you and your attorney.
Just so you know, you don't have to worry about this test if your income is less than the median income for the state in which you reside. If your income is higher than the median, you do have to go through the process. Nevertheless, there's a good chance that you'll still be eligible in the end.
The bottom line is that you can still consider bankruptcy a viable option for most people. It's important to discuss this with your lawyer to make sure you're choosing the best option for you.
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