When you are full of debt and you have no more money to pay your creditors, the only possible course of action for you to take is to file for bankruptcy.
However, there are those people who try to abuse the bankruptcy policy and only files one to protect their assets and run from their creditors. With that in mind, a bill was passed in 2005 entitled as the “Bankruptcy Abuse Prevention and Consumer Protection Act” or BAPCPA as part of the bankruptcy code. Together with the act, a means test is a given stipulation for anybody who would file for bankruptcy.
What is Means Test?
To cut it short, a means test is simply an income-based test to assess and evaluate your financial situation. It is a common knowledge that those who file for bankruptcy due to lack of cash money for payments can make use of their assets as a form of payment.
The means test then is an evaluation of whether or not a person is fit to file for a Chapter 7 bankruptcy or do with a Chapter 13.
Difference of Means Test
Filing for a Chapter 7 or Chapter 13 bankruptcy depends entirely on the valuation between your income and assets and your outstanding debts. To understand what is means test better and whether or not there is a difference, you have to understand first what Chapter 7 and Chapter 13 bankruptcy entail.
For most consumers, Chapter 7 bankruptcy is the more popular type to file than Chapter 13. With this type of bankruptcy, the court can easily discharge most of your debts. Such discharge order gives the bankruptcy trustee the rights to take any property that is not exempted from collection. The trustee will then pay the creditors with the proceeds from the sales of those properties taken from you. On the other hand, a Chapter 13 bankruptcy does not necessarily make you lose any property. Instead, you agree to go through a repayment plan using your income.
The Means Test: An Objective Tool
As an objective tool, the means test is generally used to limit the use of Chapter 7 bankruptcy. Meaning to say, only those who are deep in debts and have no more viable source of income can be eligible to file for a Chapter 7 bankruptcy.
However, your chances of passing a means test are fifty-fifty – you may pass it or you may fail it. The means tests can become fairly complex especially if you don’t know exactly what you are dealing with. Failing the means tests – which is meant to make you become eligible for Chapter 7 bankruptcy – only means that you have to consider the option of filing for a Chapter 13 bankruptcy.
What does the Means Test Cover?
The means test actually focuses on two things: your monthly income and your disposable income.
When the country’s median incomes is higher than your monthly income, you automatically become eligible for Chapter 7 bankruptcy. On the other hand, having a higher income might make the court reconsider your position to see if you have enough funds available to pay your debts. Also, if the court finds that you have insufficient disposable income to go through paying your debts monthly, then you can be eligible for Chapter 7 bankruptcy. Failing the means test on both accounts will then require you to file for Chapter 13 bankruptcy.