When you file for bankruptcy, there are a few different types that you can choose from. But it may not all be a choice. In some cases, you will qualify for one type of bankruptcy—such as Chapter 7—while not qualifying for another type, such as Chapter 13.
To make this determination, the court will sometimes use a means test. What is this, and why is it important? What does it mean if you pass or fail this test?
Income and assets
The means test essentially measures your income and assets to determine which type of bankruptcy you qualify for and which may work in your situation. The reason for this is that the two main chapters used by personal bankruptcy filers are very different.
With Chapter 7 bankruptcy, non-exempt assets are liquidated and remaining debt is then forgiven. If someone has very limited income—or none at all—this will likely be the route taken, because the only items of value they have are those non-exempt assets. Most debt is erased afterward, giving them a fresh start.
But for Chapter 13, the court creates a repayment plan. This is a wage-earner’s bankruptcy plan, and so it is based around your income. You do not have to liquidate assets, but you do have to make payments into the repayment plan moving forward. It often lasts for up to five years. As such, the results of the means test determine which Chapter you may be able to use.
While going through this process and weighing your options, it can help to work with an experienced legal professional.