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What is the means test under Chapter 7 bankruptcy?

Last week, this Tennessee bankruptcy blog discussed some of the reasons that a person may not be able to pursue Chapter 13 bankruptcy. This week's post will focus on one of the major requirements a debtor must pass in order to be eligible to file for Chapter 7 bankruptcy: the means test.

Also known as liquidation bankruptcy, Chapter 7 bankruptcy involves the selling off of a debtor's property to raise money to use to satisfy the debtor's creditors. Before a debtor may begin liquidating what they own, though, they must pass the means test. The first part of the means test involves comparing the debtor's income to the median income of their state.

The court will look at the debtor's prior six months of income. If that average is equal to or less than the state's median monthly income, then the debtor is eligible to pursue Chapter 7 bankruptcy. If it is greater than the state's median then the debtor must go on to the second part of the means test.

The second part of the means test involves looking at the debtor's disposable income. If after accounting for all of the debtor's expenses and costs they still have some disposable income that could be paid to their creditors then the debtor would likely have their Chapter 7 liquidation case turned into a Chapter 13 reorganization case.

This simplification of the Chapter 7 means test should not be read as legal advice for individuals considering bankruptcy. Rather, it should be used as a starting point for people who wish to open a dialogue about bankruptcy with their trusted debt relief and bankruptcy lawyers.

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Kenneth C. Rannick, P.C.
4416 Brainerd Road
Chattanooga, TN 37411

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