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Simple English definitions for legal terms
Means Test
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A quick definition of Means Test:
The means test is a way to determine if someone is eligible for Chapter 7 bankruptcy. It looks at the person's income and expenses to see if they can afford to pay their debts. If their income is below the median income in their state, they automatically pass the test. If their income is above the median, they have to go through a second step that looks at their expenses. Depending on the results, they may only be eligible for Chapter 13 bankruptcy instead of Chapter 7. The purpose of the means test is to prevent people from abusing the bankruptcy system and to ensure that those who truly need help get it.
A more thorough explanation:
The means test is a formula used in bankruptcy law to determine if a person is eligible for Chapter 7 bankruptcy. This test is used to prevent people from abusing the bankruptcy system by filing for Chapter 7 bankruptcy when they could afford to pay some of their debts. The test mainly checks the debtor's ability to pay their creditors.
The means test has two steps:
- Is the debtor's current monthly income more than the median income in their state?
- If the answer to step 1 is yes, the debtor must reduce their current monthly income by expenses and multiply the difference by 60 months. If the resulting amount is:
- More than or equal to $12,850,000, the debtor falls automatically under Chapter 13 bankruptcy.
- More than 25% of the unsecured debt, the debtor falls automatically under Chapter 13 bankruptcy.
- Less than or equal to 25% of the unsecured debt, the debtor can choose either Chapter 7 or Chapter 13 bankruptcy.
- Less than or equal to $7,700,000, the debtor can choose either Chapter 7 or Chapter 13 bankruptcy.
To pass step 2 of the means test, the debtor must record their expenses, including food, clothing, housing, utilities, and transportation. Some expense deductions can be increased if the debtor can show that they are actual, reasonable, and necessary expenses.
Let's say John lives in California and wants to file for Chapter 7 bankruptcy. The median income in California is $75,277. John's current monthly income is $8,000. Since John's income is higher than the median income in California, he must move on to step 2 of the means test.
John records his expenses and finds that his monthly expenses total $6,000. He subtracts his expenses from his income, which leaves him with $2,000. He multiplies $2,000 by 60 months, which equals $120,000. Since $120,000 is more than $12,850,000, John is not eligible for Chapter 7 bankruptcy and must file for Chapter 13 bankruptcy instead.
This example illustrates how the means test works and how it determines a person's eligibility for Chapter 7 bankruptcy.