Individuals who intend to file for bankruptcy have two options: a Chapter 7 filing or a Chapter 13 filing. Both of these types of bankruptcy aim to discharge your eligible debts in order to bring you financial freedom and peace, but they do so with different processes.

Chapter 13 bankruptcy restructures your finances. You create a 3- to 5-year plan (possibly extended under the new CARES act) to pay your creditors back as much as you can. 

Chapter 7 bankruptcy, on the other hand, takes place over the course of a handful of months. Your assets are liquidated, meaning creditors can take back collateral, or any non-exempt assets, to satisfy your debts. Most people think of Chapter 7 when they think of a classic bankruptcy. Although it is somewhat more severe, many people prefer it because it can be done with so much more quickly than Chapter 13. 

While Chapter 7 bankruptcies are preferred by many, not everyone is eligible. To qualify, you must take something called the “means test.” This test can be split into two parts.

Part One

First, you need to determine your annual income and see how it compares to an average household of a similar size in the same state as you. Do you make less? If the median household income in your state is $35,000 and you make $34,999 a year or less, you’ve passed the means test and don’t need to do anything else. If you make above the median income, there’s still a chance you might qualify and you can continue on to Part Two to find out.

Part Two

Gather documentation to demonstrate your expenses for the last six months. Subtract essential (referred to as “allowable”) expenses from your income. The remaining number is your disposable income. A low enough disposable income means you’ve passed the test.

Now what?

If you passed the means test, it doesn’t necessarily mean that Chapter 7 bankruptcy is the right fit for your situation, just that you qualify for it. And if you don’t qualify you still have other options. Either way, the next step is to sit down with an experienced bankruptcy attorney. The Hedtke Law Group is here to help you. Whether you have questions about bankruptcy or you are ready to partner with us, we encourage you to contact us today. We can’t wait to hear from you!