What is the Chapter 7 Bankruptcy Means Test?
The Chapter 7 Bankruptcy means test is a way to evaluate your eligibility to file for bankruptcy. Every Chapter 7 applicant needs to take the means test to determine if they're qualified. Chapter 7 bankruptcy is designed for individuals to discharge most forms of unsecured debt to protect them from creditors. It's considered to be more dire than Chapter 13 bankruptcy, as successfully filing for Chapter 7 would result in the liquidation of your assets. Chapter 13 bankruptcy, on the other hand, is designed for those who can pay off some of their debts, while deferring the remaining debts into a payment plan.
The means test primarily exists to make sure only those who aren't in a position to pay off their debts can file. Those who are determined to be able to repay part of their debts won't be eligible to file for Chapter 7.
To be eligible for Chapter 7, your available income will have to be within your state's guidelines.
It typically consists of at least one or more forms. These forms help you determine if your means (your financial resources) are more or less than what qualifies you to file for bankruptcy.
In the case of bankruptcy, "means" refers to the amount of income you have available. Income levels vary state-to-state, so to qualify for a Chapter 7 bankruptcy, you need to make less than the average income level for a family of the same size in your state.
If you make more than that, you might still qualify, but you have a few more steps to take before you can be sure. If you make less than the median income for your state, you qualify for a Chapter 7 bankruptcy, and you're now done with the means test!
How the Chapter 7 Bankruptcy Means Test Works
There are a few steps to the means test, but it's nothing complicated you have to study for. It's a simple calculation to see if you make more or less than the average family of the same size in your state. Here are the steps in the means test:
Step 1: Determining Your Household Income
The first step in the Chapter 7 means test is to determine your household income. In this instance, you will need to calculate your current monthly income over the past six months.
Step 2: Compare Your Income to the State Median
Once you have your income calculated, the next step is to compare your income to your state's median income. If your income is below the state median, you'll automatically be eligible to file for Chapter 7.
Step 3: Subtract Allowable Expenses
If your current monthly income is higher than your state's median, you'll have to calculate your disposable income. Disposable income refers to the income you have left over each month after paying your allowed monthly expenses, such as rent, mortgage, and auto loan obligations. If the means test proves that you can afford the necessities and still have enough left over to attempt making payments on your unsecured debt, such as credit cards, you're not likely to qualify for Chapter 7 bankruptcy.
What Happens if You Pass or Fail the Means Test
Passing the means test means you are able to proceed with filing your Chapter 7 bankruptcy. However, if you fail the means test, it means that a liquidation bankruptcy isn't for you. Let's take a look.
If You Pass The Means Test
If you pass, you can file Chapter 7 bankruptcy. If you do qualify for a Chapter 7 bankruptcy, and you have an auto loan, you have a few options. Typically, if you can protect the value of your car with a vehicle exemption, you may be able to keep it. However, if your vehicle is worth more than you can exempt, you need to decide upfront if you want to keep it and the loan.
Here are the standard options that usually apply to borrowers who are considering Chapter 7 bankruptcy:
Reaffirmation:
Reaffirmation means that you and your lender agree to the terms of your original or renegotiated contract, and you agree to continue making payments as scheduled. Since reaffirmation involves signing a new agreement with your lender, you may be able to negotiate the terms of your loan at this time.
Often, borrowers who are facing bankruptcy and have an upside-down loan can get rid of that negative equity by having the lender agree to accept the current market value of the vehicle, instead of what's owed on your loan. You may even be able to reaffirm your loan if you're behind on payments by having the lender roll those missed payments into your new agreement.
Reaffirmation isn't available in every situation, or every state, so you must understand whether or not you qualify.
Redemption:
To redeem your car, you pay the lender the current value of the vehicle in one lump sum instead of your loan amount. You can do this whether you're current on your loan payment or not, as long as you have the funds to do it. In this case, you can save a lot of money if your car has depreciated a lot or you're in a negative equity position.
Surrender the vehicle:
If you choose not to keep your auto loan when you file Chapter 7 bankruptcy, you must select this option when you file. If this is your choice, you return the vehicle and are released from all liability on any remaining loan balance.
If You Fail The Means Test
To fail the means test is to be ineligible for Chapter 7 bankruptcy. However, if you were determined ineligible to file for Chapter 7 bankruptcy, you can still file for Chapter 13.
Chapter 13 gives you either three or five years to repay your creditor at least a portion of what you owe before any remaining unsecured debt is wiped away in a successful discharge. This differs from Chapter 7 bankruptcy, where your assets are liquidated to recover as much money as possible to repay your debts.
Exceptions to The Means Test
There are a few exceptions to the means test. Keep in mind that the Chapter 7 means test is designed for consumer debt. If more than half of your debt is business debt, you can file for Chapter 7 without taking the test.
Other exceptions include those for disabled veterans and active duty military personnel.
The Bottom Line
Once you're discharged from your Chapter 7 bankruptcy, typically after four to six months, you should be able to qualify for a new car loan if you need one, but you may need to work with a bad credit lender. Bankruptcy takes a toll on your credit score, which can make it difficult to qualify for vehicle financing through all lenders, but we want to help make it a little easier.
Here at Auto Credit Express, we've gathered a network of special finance dealerships that are signed up with subprime lenders to help people in unique credit situations, such as post-bankruptcy. We've been connecting consumers with local dealerships for over 20 years, and we want to help you, too. Get started right now by filling out our fast, free, no-obligation auto loan request form.
