When people in Utah file for bankruptcy, they typically do so through either a Chapter 7 or a Chapter 13 filing. The bankruptcy means test helps determine if you qualify for Chapter 7 relief.
Chapter 7 bankruptcy, which is a “liquidation bankruptcy,” gives you a fresh start by discharging most of your unsecured debts, such as credit card balances and medical bills. However, eligibility for Chapter 7 hinges on the results of the bankruptcy means test.
How the means test works
The bankruptcy means test is a two-step evaluation aiming to accurately measure your financial stability. The first step involves determining whether your income falls below the median income for your household size in Utah. The Census Bureau provides that establishes these median income figures. If your income is below the median, you pass the test and become eligible for Chapter 7.
If your income exceeds the median, you proceed to the second step. Here, you calculate your disposable income, which is the amount left over after deducting allowable expenses. These expenses include mortgage or rent payments, utilities, insurance and more. The goal is to determine if you have enough disposable income to repay a portion of your debts over time.
Why the means test matters
There are several reasons the means test is in place. First, it helps prevent abuse. Evaluating income and expenses prevents individuals with the means to repay their debts from using Chapter 7 to discharge them. It also helps ensure fairness by establishing a consistent standard across the country. Finally, it helps promote repayment plans by encouraging those with higher incomes to file for Chapter 13, which involves making a repayment plan.
Most people who take the means test pass it easily. Forbes reports that 94% of people who take it determine they are eligible for Chapter 7.