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Why do I need to pass a means test for Chapter 7 bankruptcy?

In an effort to cut down on potential cases of bankruptcy fraud, individuals seeking bankruptcy relief must effectively prove that they are financially incapable of repaying their debts. This is known as the means test. Unlike school exams that give Washington students either a passing or failing grade, failing the means test is not necessarily a negative outcome, as passing simply means that the filer is eligible for Chapter 7 bankruptcy.

There are two steps that encompass the means test for bankruptcy, the first of which addresses household income. Filers must gather the necessary documentation to give an accurate depiction of the previous six months of income. Individuals who earn less than the median state income automatically qualify for Chapter 7. Only 12 percent of 2013 bankruptcy filers did not pass the first step of the means test, although they were able to proceed on to the next step.

In step two, people seeking to pass the means test must provide further documentation of their allowable expenses that cover that past six months. Allowable expenses cover necessary items, such as groceries, medical costs, rent and even clothing. Any income that is left over after deducting allowable expenses from income is labeled as disposable income, which could possibly be used to pay off debt. If a person's disposable income is exceedingly low, then he or she can still qualify for Chapter 7. If disposable income is not deemed to be low enough, the income can instead be used to help construct a payment plan for Chapter 13.

Since the means test can make the difference between a person's ability to file for Chapter 13 or Chapter 7 bankruptcy, accuracy is especially important. If possible, most Washington filers are well advised to gather as much documentation for both income and allowable expenses as possible. Being adequately prepared for the means test can allow the bankruptcy process to proceed as smoothly as possible.

Source: NerdWallet, "The Bankruptcy Means Test: What It Is, Why It Matters", Sean Pyles, July 14, 2016

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