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How does Chapter 7 means testing work?

On Behalf of | Aug 27, 2021 | Chapter 7 Bankruptcy |

When filing for bankruptcy, the person heading to court must choose a particular category, either Chapter 7 or Chapter 13 bankruptcy. Chapter 7 bankruptcy may be a more common option, but not everyone planning to visit an Illinois federal court understands what it entails. Knowing some basic details about Chapter 7 bankruptcy could help those weighing a decision to seek bankruptcy protection.

The basics of Chapter 7 bankruptcy

When someone is unable to pay their debt obligations, bankruptcy might prove inevitable. At the very least, filing for bankruptcy means that creditors can no longer harass someone to make payments. The bankruptcy court puts an end to collection action. With Chapter 7, the individual does not agree to any payment plans as would be the case with Chapter 13. Instead, certain property faces liquidation to pay creditors, and some debts face discharge. Qualifying for Chapter 7 involves passing a “means test.”

A means test for bankruptcy

The means test establishes whether someone qualifies for Chapter 7 bankruptcy. A means test examines the bankruptcy filer’s income to see if the person qualifies. The court looks at the individual’s income in relation to monthly expenses to determine how much disposable income the person has available, among other factors. Someone with significant disposable income may be ineligible for Chapter 7 bankruptcy.

The means test works to keep individuals with high earnings and significant disposable income from filing for Chapter 7. However, someone may still file for Chapter 13 bankruptcy. Doing so would require directing funds to creditors through a payment plan.

Those who are able to pass the means test can file for Chapter 7 bankruptcy. They may need to have some property sold to pay creditors, but after the rest of their debts get discharged, they can have a fresh financial start.