When some debtors find out the Chapter 7 bankruptcy process involves a test, they immediately shift into study mode. They want to know if they should be reviewing their notes, making flashcards, or trying to memorize sections of the bankruptcy code. Most of them are relieved to find out the test we mentioned is not that kind of examination.
Rather than a multiple choice quiz or essay exam, the means test is a government-designed set of factors that measure a debtor’s income, expenses, and family size. The government believes that by looking at these factors it can determine which debtors should have their debts forgiven, and which debtors should try to repay their debts.
At Hanson & Payne, LLC, our experienced team of bankruptcy attorneys help Milwaukee area residents work their way through the means test, and navigate the personal bankruptcy system.
The Chapter 7 Means Test
In the early 2000s, Congress overhauled the bankruptcy code. One of the things it did was try to make it harder for people to file for Chapter 7 bankruptcy.
At the time, policy makers were under the impression that people who could actually afford to repay their debts were instead filing for Chapter 7 bankruptcy and having them forgiven. There is no evidence this was actually happening, but now everyone who wants to file for Chapter 7 bankruptcy must now pass the means test.
The means test measures a filer’s income, expenses, and family size to determine whether the government thinks the filer has enough disposable income to repay his or her debts.
There are two parts to the test.
The first — and sometimes only — step in the test checks whether the filer’s average household income for the past six months is below the median Wisconsin income. All household income is used to calculate current monthly income. The only income a filer is not required to include is income from Social Security retirement, SSI, or SSDI.
If the filer’s household income is below the state’s median income, they’ve passed the means test and can file for Chapter 7 bankruptcy.
Anyone who fails step one of the means test must proceed on to step two if they still wish to file for Chapter 7 bankruptcy.
In step two of the means test, the court collects information about the filer’s spending over the last six months in order to calculate the household’s disposable income. The court takes the household income calculated in step one of the means test and subtracks “allowable expenses” — things like rent, groceries, and medical expenses — from it. What is left over is deemed “disposable income” that the court assumes a filer could be using to pay off debts.
What expenses are considered allowable varies based on what area of the country a filer lives in. There are specific guidelines on allowable expenses for the Milwaukee area.
If a filer has very little disposable income left over after subtracting allowable expenses, he or she passes the means test and may file under Chapter 7.
Strong Client Advocates
Hanson & Payne clients do not have to figure out means testing on their own. Our team helps clients gather the information needed to calculate their average income, pulls the comps to other Wisconsin families, and adds up allowable expenses.
When clients have made a significant lifestyle change during the past six months that alters their current average income we make sure the courts know. Nobody should be denied bankruptcy relief because they got divorced, welcomed a new baby, suffered a health crisis, or saw some other significant event impact their income.
Experienced Milwaukee Bankruptcy Attorneys You Can Trust
Although the means test was designed to restrict the number of debtors who have their debts forgiven under Chapter 7, most people who take the means test pass it easily. It is typically just another hoop that filers need to jump through, and the Hanson & Payne team is ready to help Milwaukee area debtors clear it.
If you have questions about means testing, or about bankruptcy in general, please contact us to schedule a meeting.