The means test for Chapter 7 bankruptcy is a crucial tool used to determine whether an individual qualifies for this type of debt relief. It calculates whether your income, after allowable expenses, falls below a certain threshold, allowing you to discharge unsecured debts like credit cards and medical bills. The means test ensures that only those truly in need can file for Chapter 7 bankruptcy. This process helps the court assess your financial situation and decide the best course for your debt resolution.
If you’re considering filing for Chapter 7 bankruptcy in New Jersey, understanding the means test is the first step. At Straffi & Straffi Attorneys at Law, our experienced team of New Jersey Chapter 7 bankruptcy attorneys can guide you through the entire process, thoroughly evaluating your financial situation, assisting you through the bankruptcy proceedings, and providing post-discharge advice such as what you cannot do after filing Chapter 7. Contact us today at (732) 341-3800 to discuss your options and see if a Chapter 7 filing is right for you.
The Purpose of the Chapter 7 Means Test
The means test is a standardized method used in New Jersey and across the U.S. to determine whether an individual qualifies for Chapter 7 bankruptcy. Its primary function is to distinguish between those who can repay their debts and those who truly need debt relief through a Chapter 7 discharge. For those considering Chapter 7 in New Jersey, passing the means test is the first essential step toward financial relief.
Why the Means Test Exists
The means test was introduced as part of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) to limit the number of high-income individuals who could discharge debts through Chapter 7 bankruptcy. Before the means test, many individuals who had the financial means to pay back some of their debts were still discharging them entirely. Now, the test ensures that those with higher incomes are directed towards Chapter 13, which involves a structured repayment plan.
In New Jersey, this test is especially important because it compares your household income to the state’s median income levels. If you pass the test, you are presumed eligible for Chapter 7. If not, you may need to explore other bankruptcy options, such as Chapter 13.
How the Means Test Determines Eligibility
The means test evaluates your ability to repay debt based on your income and expenses over the past six months. It’s a two-part process that begins by comparing your income to New Jersey’s median income levels. If your income is below the median, you automatically qualify. If it’s above, the test goes further by calculating your disposable income after deducting certain expenses.
Key aspects of how the means test works:
- Calculating Your Income: The test requires you to average your household income over the six months preceding your bankruptcy filing. This includes all forms of income, such as wages, rental income, and other earnings.
- Comparing to New Jersey’s Median Income: The New Jersey median income levels are updated regularly and depend on the size of your household. For example, a household of four will have a higher median income threshold than a single individual.
- Allowable Expense Deductions: After calculating your income, the test allows you to deduct specific living expenses from your income. These include necessary expenses such as:
- Housing and utilities: Based on IRS guidelines for your region.
- Transportation costs: Including car payments and fuel costs.
- Food and clothing: Necessary living costs determined by national standards.
- Health care costs: Expenses such as insurance premiums and medical bills.
- Final Disposable Income Calculation: After all deductions, your remaining disposable income is calculated. If it falls below a certain amount, you qualify for Chapter 7. If it exceeds the allowed threshold, you may need to file for Chapter 13 instead.
This process makes sure that Chapter 7 bankruptcy is reserved for individuals who genuinely cannot afford to pay their debts while giving a structured path (Chapter 13) to those who can pay back at least a portion.
| Key Aspect | Description |
|---|---|
| Calculating Your Income | The test averages your household income over the six months prior to filing, including wages, rental income, and other earnings. |
| Comparing to New Jersey’s Median Income | Your income is compared to New Jersey’s median levels, which vary based on household size. If your income is below the median, you qualify automatically for Chapter 7. |
| Allowable Expense Deductions | Certain living expenses such as housing, utilities, transportation, food, and healthcare are deducted from your income based on IRS guidelines and national standards. |
| Final Disposable Income Calculation | After deductions, your remaining disposable income is calculated. If it’s below the threshold, you qualify for Chapter 7; if above, you may need to file for Chapter 13. |
How to Calculate Your Income for the Means Test
Accurately calculating your income is the first and most critical step in passing the Chapter 7 means test in New Jersey. The test requires that you assess your household income over the last six months to establish an average monthly income. This income calculation is pivotal because the results determine whether you will proceed further with Chapter 7 or need to explore other bankruptcy options like Chapter 13.
Sources of Income to Include
When reporting your income for the means test, it’s important to include all relevant sources. In New Jersey, the entire household’s income is considered, even if your spouse is not filing for bankruptcy with you. This includes not only your primary job earnings but any other income streams you or other household members may have. Key sources of income that must be reported include:
- Wages and salary
- Self-employment income.
- Rental income
- Unemployment benefits
- Pension or retirement income
- Side jobs or gig work
It’s crucial to be thorough when calculating income because leaving anything out can lead to inaccurate results and potentially disqualify you from filing for Chapter 7 bankruptcy.
Calculating Your Monthly Income
To calculate your monthly income for the means test, you must look back at your income over the previous six full months before filing for bankruptcy. This approach ensures that the means test reflects a more accurate average of your financial situation, especially if your income fluctuates. Begin by gathering all relevant income documentation for each of the six months, such as pay stubs, bank statements, and other records that show your earnings. Once you have this information, total your income for each individual month. This is particularly important if your earnings have varied during this time, as it will help create a clear picture of your overall financial state.
After calculating the total income for each month, you will add up the six-month totals and divide the result by six. This calculation provides your average monthly income, which will be used in the means test to determine your eligibility for Chapter 7 bankruptcy. If you have experienced significant fluctuations in income due to bonuses or pay cuts, the six-month average helps smooth out these changes, providing a more consistent figure. In some cases, waiting an additional month before filing could bring your average income down, potentially improving your chances of passing the means test, especially if your income has recently decreased.
Median Income Limits for New Jersey
Once you have calculated your average monthly income, the next step is to compare it to the median income levels for New Jersey. The state’s median income levels are updated regularly, and they vary depending on the size of your household. For instance, as of April 2024, the median income limits in New Jersey are as follows:
- 1 person: $83,102
- 2 people: $100,763
- 3 people: $130,239
- 4 people: $157,404
- 5 people: $167,304
- 6 people: $177,204
- 7 people: $187,104
- 8 people: $197,004
- 9 people: $206,904
If your average annual income, based on the six-month average, is below these thresholds for your household size, you automatically pass the means test. However, if your income exceeds these limits, the means test will continue to the next stage, where your expenses will be deducted to determine whether you can still qualify for Chapter 7 bankruptcy.
Deducting Expenses from Income
Once your income has been calculated, the next phase of the means test involves deducting allowable expenses. These deductions reduce your income and help determine whether you have enough disposable income left to pay your debts. New Jersey uses IRS guidelines for allowable expenses, ensuring that deductions are based on national and local standards for necessities such as housing, utilities, transportation, and food. These deductions are critical because they can determine whether you pass or fail the means test.
Allowable Living Expenses
Allowable living expenses are based on both national and local standards, and they cover essential costs for maintaining a basic standard of living. These expenses include:
- Food and groceries
- Clothing and personal care
- Out-of-pocket healthcare costs
The IRS sets fixed amounts for these expenses based on the size of your household. Even if you spend less in some categories, the full allowable amount will be deducted to provide an accurate reflection of your necessary living costs.
Necessary Business or Employment Costs
If you are self-employed or incur significant costs related to your job, the means test allows you to deduct necessary business and employment expenses. These expenses must be directly related to producing income and may include:
- Office supplies
- Travel expenses
- Equipment costs
- Utilities
These deductions help paint a more accurate picture of your disposable income, especially if a significant portion of your earnings is reinvested in maintaining or operating your business.
Housing and Utility Expense Guidelines
Housing and utility expenses are some of the largest deductions allowed under the means test. These deductions are based on local standards and depend on where you live in New Jersey, as housing costs vary significantly across the state. The allowable expenses include:
- Rent or mortgage payments: Based on the average cost of housing in your area.
- Property taxes and home insurance: Necessary costs to maintain your residence.
- Utility costs: These include gas, electricity, water, and trash collection fees, as well as telecommunications such as phone and internet services.
The IRS caps these deductions based on your specific location in New Jersey, making sure that they reflect actual costs without inflating your allowable expenses. For example, housing costs in northern New Jersey are typically higher than in other parts of the state, so the allowable expenses for those areas may be greater.
What It Means to Pass the Means Test
Passing the means test indicates that you meet the financial eligibility requirements for Chapter 7 bankruptcy. It means that after accounting for allowable expenses, your disposable income is not sufficient to cover your outstanding debts. Passing the test allows you to proceed with filing Chapter 7, which can discharge most unsecured debts such as credit card balances, personal loans, and medical bills. For those in New Jersey, passing the means test can be particularly advantageous if they are facing high consumer debt with little to no disposable income left at the end of each month.
Once you pass the means test, the next steps in the Chapter 7 process include submitting the necessary bankruptcy forms and schedules, attending the mandatory credit counseling session, and meeting with a bankruptcy trustee. Your non-exempt assets (if any) may be liquidated to pay creditors, but some assets are protected under New Jersey’s bankruptcy exemptions, allowing you to keep essential property while discharging eligible debts.
Steps to Take if You Fail the Means Test
Failing the means test can be disheartening, but it doesn’t necessarily mean that bankruptcy relief is out of reach. There are several options you can explore if you fail the means test. One of the first steps is to review your financial situation for any “special circumstances.” Special circumstances are exceptional conditions that may justify a higher income or unusual expenses that skew the means test results. Common examples include:
- Serious medical conditions that incur substantial medical expenses.
- Active military duty, which may affect your income or financial obligations.
If you believe special circumstances apply, you will need to provide detailed documentation, such as medical bills or military orders, to the bankruptcy court. Additionally, you must submit a written explanation justifying why these expenses or income adjustments should allow you to pass the means test despite initially failing.
If no special circumstances apply or the court rejects your claim, your next option is Chapter 13 bankruptcy. Under Chapter 13, you create a structured repayment plan to pay back creditors over a 3-5 year period. While this doesn’t discharge your debts immediately like Chapter 7, it allows you to repay what you can over time while protecting assets like your home or car from being sold off.
Alternatives to Chapter 7 Bankruptcy
If you fail the means test and decide that Chapter 13 isn’t suitable for your financial needs, there are other alternatives you can consider to manage your debt outside of bankruptcy. These alternatives may provide more flexible ways to handle your debt while avoiding the legal and financial ramifications of bankruptcy.
Debt Negotiation
One alternative is negotiating directly with your creditors to create a more manageable payment plan. Many creditors are willing to work with debtors to reduce interest rates or extend payment terms, especially if they are aware that bankruptcy is a possible outcome. You may be able to settle your debts for less than the full amount owed.
Debt Consolidation
Debt consolidation involves taking out a single loan to pay off multiple debts. This option may help by combining several high-interest debts, such as credit cards, into one loan with a lower interest rate and a single monthly payment. This can simplify your debt repayment process and potentially save you money in interest over time.
Debt Management Plans (DMPs)
Another alternative is enrolling in a debt management program through a credit counseling agency. A DMP consolidates your debt into one monthly payment, and the agency works with your creditors to negotiate lower interest rates or waive certain fees. This can be a good option for those who want a structured plan to pay off their debts over time without resorting to bankruptcy.
Ultimately, even if you fail the means test for Chapter 7, there are various options to explore that can help you reduce or manage your debt. Chapter 13 remains the formal alternative within bankruptcy, but debt negotiation, consolidation, and management programs provide viable paths to avoid the lengthy and complex process of bankruptcy altogether.
Exemptions to the Means Test
Not all individuals filing for Chapter 7 bankruptcy are required to pass the means test. Certain groups of debtors qualify for exemptions, allowing them to bypass this step entirely. One significant exemption applies to individuals with primarily non-consumer debts, such as business or investment-related debts. If the majority of a debtor’s obligations are classified as non-consumer, the means test is not applicable, simplifying the bankruptcy process.
Another important exemption applies to disabled veterans who incurred debt while on active duty or performing homeland defense activities. To qualify for this exemption, the veteran must have a disability rating of at least 30%, and more than half of the debt must have been accumulated during active service. This guarantees that veterans who have served the country and are facing financial difficulties due to their service are not required to pass the means test when seeking bankruptcy relief under Chapter 7.
These exemptions are designed to provide relief to individuals facing financial challenges due to specific circumstances, streamlining their access to debt discharge through Chapter 7 bankruptcy.
Contact Straffi & Straffi Attorneys at Law for Chapter 7 Bankruptcy Legal Assistance
Understanding and completing the means test is a key part of filing for Chapter 7 bankruptcy. It determines whether you qualify for debt relief based on your income and expenses. Straffi & Straffi Attorneys at Law provides quality legal assistance to New Jersey residents through this process, helping ensure all steps are handled with care.
If you’re unsure about your eligibility for Chapter 7 or need help with the means test, contact Straffi & Straffi Attorneys at Law at (732) 341-3800. Our team of New Jersey Chapter 7 bankruptcy lawyers is ready to help you take control of your financial future.
from Straffi & Straffi Attorneys at Law https://www.straffilaw.com/what-is-the-means-test-for-chapter-7/
