Chapter 7 is the most commonly filed form of bankruptcy. There are two main reasons for its popularity: it is over quickly, with most cases being discharged in three to five months, and it wipes away unsecured debt. The primary drawback is that the trustee can seize any debtor property not protected by an exemption and sell it to repay creditors, but most people who file for Chapter 7 never lose any personal property.
This form of bankruptcy is intended to provide debt relief to people who have little to no ability to pay their debts. Those in a financial position to repay a portion of what they owe are required to file for Chapter 13, which allows them to repay as much as they can afford over a three-to-five-year period. Courts use the means test to determine which bankruptcy chapter you qualify for.
The means test explained
The means test is intended for those who have mostly consumer debts, such as credit card bills, medical debt, and unpaid cell phone or utility bills. (If your debt comes primarily from a business you own, you don’t have to take the test.) The first part of the test confirms whether your household income is below the median income for New York State. If it is, you’ve passed and can file for Chapter 7.
If it isn’t, you may still be able to file if you pass a second stage of the test. This one calls for you to gather documentation about allowable expenses such as rent, groceries, and medical bills, and deduct them from your income. If, after all deductions, your disposable income is low, you may still qualify for Chapter 7.
Means test mistakes
Passing the means test requires you to be accurate and thorough with your bankruptcy paperwork. Mistakes like those below could force you into Chapter 13 when you are eligible for Chapter 7.
- Deduction errors. This misstep includes making deductions that are not permitted in a New York bankruptcy (such as your children’s college expenses and contributions to your retirement accounts) and failing to make allowable deductions. Examples of the latter include home taxes and court-ordered payments.
- Miscalculating household size. The bigger your household, the more income the means test allows you to have. The problem is that the U.S. bankruptcy laws have no real definition of “household.” Some courts define it as whoever lives in your house, others only allow you to count the people you claim as dependents on your tax return, and even more use the economic unit standard, which includes anyone you support or depend on financially. A New York bankruptcy attorney can advise you on which approach is favored by your local court.
- Miscalculating income. The means test reviews your last six months of income before filing for Chapter 7. Many filers, however, make the mistake of not ending the calculation period on the last day of the calendar month before filing. The result is an inaccurate total, so pay careful attention to the dates on your pay stubs and other proof of income.
If you want to regain financial solvency by filing for Chapter 7, a New York bankruptcy attorney can explain the means test parameters and ensure that you present the information needed to prove your eligibility for Chapter 7 protection. Jayson Lutzky is an experienced bankruptcy lawyer who offers free initial consultations in his Bronx office. Call 718-514-6619 to set up an appointment and visit www.MyNewYorkCityLawyer.com/Bankruptcy to learn more about how to get a fresh financial start.