If you are considering filing for Chapter 7 bankruptcy in Kentucky, it’s important to familiarize yourself with the means test. This is used to determine if you qualify for a debt discharged during Chapter 7 bankruptcy. Generally, filers whose household income falls below Kentucky’s median income automatically qualify. Those with higher incomes can still qualify after a more detailed review of finances. Understanding how the means test works can help you determine if Chapter 7 or Chapter 13 bankruptcy may be the better option for your circumstances.
What Is the Chapter 7 Means Test?
Kentuckians who file petitions under Chapter 7 of the United States Bankruptcy Code usually expect to have all of their debts discharged by the bankruptcy court at the close of the proceedings. However, persons who look to Chapter 7 to eliminate their debt do not always understand that they may be required to meet a threshold that requires them to submit their monthly income and expenses to the court for review before they are eligible for a Chapter 7 discharge. This test is commonly called the “means test.”
The means test was established through the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) as a way to ensure that individuals who have sufficient disposable income as a means of repaying at least a portion of their debts through Chapter 13 bankruptcy rather than receiving a Chapter 7 discharge. This ultimately distinguishes between those who need immediate relief and those who can repay a portion of their debts
What Does the Means Test Do?
- Determines whether you qualify for Chapter 7 bankruptcy
- Compares your household income to the Kentucky median income levels
- Reviews certain allowable expenses if your income exceeds the median of other households of your size in Kentucky
- Helps the bankruptcy courts to determine if Chapter 7 or Chapter 13 bankruptcy is appropriate
- Does not automatically prevent bankruptcy if you are not eligible for Chapter 7
Who Must Take the Means Test?
In most consumer bankruptcy cases in Kentucky, the means test primarily impacts filers whose income exceeds the applicable Kentucky median income for their household size. Individuals whose income falls below the applicable median income generally meet the requirements for Chapter 7 bankruptcy.
Because the median income figures can change on a regular basis, Kentucky filers are encouraged to review the most current income threshold to evaluate bankruptcy eligibility.
Kentucky Residents Commonly Subjected to the Means Test
- Wage earners with above-median household income
- Married couples filing jointly
- Self-employed individuals
- Small business owners with separate consumer debts
- Individuals with multiple income sources
How the Chapter 7 Means Test Works
The means test requires the debtor (or both debtors if the filing is joint) to submit a statement averaging the person’s income and expenses over the last six months and multiplying the result by 12. The resulting annual income is then compared to a table of income levels to determine Chapter 7 eligibility.
Information Used in the Means Test
- Household income from all income sources
- Wages and salaries
- Self-employed income
- Rental income
- Pension income
- Certain government benefits
- Healthcare costs
- Mortgages or rent
- Tax obligations
- Household size
What Happens if Your Income Exceeds Kentucky’s Median Income?
If household income exceeds the applicable Kentucky median income, the court will conduct a secondary analysis to consider if certain allowable expenses may be deducted to reduce income for a filer to qualify for Chapter 7.
If the court determines that sufficient disposable income remains after the allowable expenses have been deducted, a presumption of abuse may arise. In those circumstances, the court can dismiss the Chapter 7 case or require the filer to file a Chapter 13 filing.
Expenses That May Be Considered
- Housing expenses
- Utilities
- Insurance premiums
- Healthcare expenses
- Certain child care costs
- Transportation expenses
- Other allowable expenses recognized by bankruptcy law
Chapter 7 vs. Chapter 13 Bankruptcy
Passing the means test does not necessarily mean that a person should seek a Chapter 7 discharge. Many factors can affect the choice between a Chapter 13 and a Chapter 7 proceeding.
Every bankruptcy case is unique, and the most appropriate chapter for your needs will depend on your income, assets, debts, and long-term financial goals.
Key Differences Between Chapter 7 and Chapter 13
- Chapter 7 bankruptcy may discharge eligible debts more quickly
- Chapter 13 entails a payment plan lasting three to five years
- Chapter 13 can help filers catch up on payments
- Chapter 13 can help filers shield certain assets
Contact and Experienced Kentucky Bankruptcy Law Firm Today
If you are considering filing for bankruptcy in Kentucky, it’s in your best interest to work with an experienced attorney at Schwartz Bankruptcy Law Center. Our dedicated legal team understands how overwhelming the bankruptcy process can be, which is why we are committed to helping you through these matters from the moment you file to the minute you receive discharge. When you need help, do not hesitate to contact our firm today to learn how we can represent you.
