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Passing the 'means test' is essential for Chapter 7 bankruptcy

For a variety of reasons, individuals in Tennessee who have decided to file for bankruptcy may prefer to file for Chapter 7 bankruptcy rather than Chapter 13 bankruptcy. Chapter 7 bankruptcy can be finished within a matter of months, rather than the years it takes to complete a Chapter 13 bankruptcy. Moreover, in a Chapter 7 bankruptcy, certain types of debts are simply wiped out, while in a Chapter 13 bankruptcy a court-ordered payment plan is established and must be followed. However, to be eligible for a Chapter 7 bankruptcy, one must pass the "means test," a two-part test that aims to determine if the debtor has any disposable income.

First of all, the means test determines whether the debtor's household income is under the median household income for the state in which the debtor lives. The debtor's household income over the past six years is used in this part of the means test. However, if there have been changes, such as a job loss or a salary raise, these will be taken into account. If it is determined that the debtor's household income is under his or her state's median household income, that's it. The means test has been satisfied.

If the first part of the means test is not satisfied, debtors must move onto the second part. The second part takes into account allowable expenses that could lower the debtor's disposable income. What is considered to be an allowable expense is based on standards used by the Internal Revenue Service, both on the national and local level. For example, food and clothing purchases could all be deemed allowable expenses per national standards, while housing expenses and automobile payments may be deemed allowable expenses per local standards. If, after calculating allowable expenses, the debtor's disposable income is under a certain amount, the debtor may file for Chapter 7 bankruptcy.

Calculating the Chapter 7 means test is a very involved process, and even one little mistake could make a debtor ineligible. Therefore, those seeking Chapter 7 bankruptcy may want to contact a legal professional who is familiar with the means test, and can help the debtor appropriately file for Chapter 7 bankruptcy, resulting in a fresh financial start.

Source: NerdWallet, "The Bankruptcy Means Test: What It Is, Why It Matters," Sean Pyles, July 14, 2016

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