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Understanding the bankruptcy means test

If you are thinking about possibly filing for bankruptcy, you may be wondering what type of bankruptcy filing might suit your specific needs. Many people who file for personal bankruptcy protection do so through either a Chapter 7 or a Chapter 13 bankruptcy filing, but there are some important distinctions between the two types.

Chapter 7 bankruptcies, for example, are reserved for people who have limited incomes, while Chapter 13 bankruptcies typically require that you have at least some "disposable income" you can use to put toward debts. If you wish to proceed with a Chapter 7 bankruptcy filing, you must first pass what is known as the bankruptcy means test.

How the means test works

The first step in passing the bankruptcy means test involves comparing your household income against the average monthly household income in Pennsylvania. If yours falls below that of your state's average, you automatically pass the test, meaning you can move forward with your Chapter 7 filing.

If your household income is higher than that of the average household in Pennsylvania, you may still be able to pass the bankruptcy means test, but you will have to do some additional work to find out. You will have to gather thorough information and documentation relating to your expenses over the last six months to determine how many of them are "allowable expenses." Any money you have left over after paying your "allowable expenses" becomes "disposable income," meaning you should reasonably be able to use it to pay off some of your debt. Depending on how much disposable income you have at hand, you may still pass the means test. If you cannot, you may still be able to file for bankruptcy through a Chapter 13 arrangement.

If you fail to pass the bankruptcy means test, but you feel strongly about filing for a Chapter 7 bankruptcy, your best bet may be to wait six months and see if circumstances change. You can take the test again six months after your initial attempt to try to qualify again.

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