What is the “means test” that applies to Chapter 7 bankruptcy?

Our readers know that not all bankruptcy cases in Kentucky are created equal. One major potential difference in bankruptcy cases is whether they are filed under Chapter 7 or Chapter 13. As we have touched on previously, Chapter 7 bankruptcy cases are “liquidations,” while Chapter 13 bankruptcies are “reorganizations.” What this means is that while in Chapter 7 the intent is to sell or “liquidate” any non-exempt property and distribute any proceeds to creditors, in a Chapter 13 proceeding a repayment plan is proposed and, if accepted, the debtor will pay that amount to the trustee for some length of time.

One of the major components of qualifying for the Chapter 7 process is passing the so-called “means-test.” This test compares a filer’s income to the median income in the region of Kentucky where they live to determine eligibility. If it is below the median income a filer is presumed to qualify for a liquidation. However, income is not the only factor that determines what kind of bankruptcy a person will file for. There may be other advantages that would push an individual to file Chapter 13 even if he or she would qualify for Chapter 7.

While one does not have to pass the means test to file for Chapter 13 Bankruptcy, it may still come into play. This is because there are a couple options when it comes to repayment plans. Basically, if a person makes all payments under a Chapter 13 repayment plan, the remainder of the debts are discharged at the end of it, even if they are not paid in full, with a couple exceptions. For those who make more than the median income in their area, the repayment plan length will be five years, but those who pass the means test may be able to have their debts discharged after a three-year repayment plan.

In Louisville, as of 2016, the median per annum income for a one-person household was around $45,500, while the median income for a couple without children was about $51,500 for the year. These thresholds may give residents a general gauge as to where they stand with regard to the means test. However, it can get much more complicated than simply showing one’s income.