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How the bankruptcy means test determines Chapter 7 eligibility

On Behalf of | Sep 4, 2023 | BANKRUPTCY LAW - Bankruptcy |

When facing financial hardships in Wisconsin, you may want to consider filing for bankruptcy. Chapter 7 bankruptcy is one possible option, but not everyone qualifies for this type of bankruptcy.

Whether you are eligible to file for Chapter 7 hinges on whether you pass a bankruptcy means test.  The test is a financial assessment used to gauge whether you have the means to repay your debts or if you genuinely need the debt relief available through Chapter 7 bankruptcy.

The first step in the means test

The first step of the means test involves calculating your current monthly income. This figure includes all sources of income, including wages, rental income and so on. Once you have your monthly income, the next step is to compare it to the median income in Wisconsin. This median income level is specific to your family size. If your income falls below the median income level, you typically qualify for Chapter 7 bankruptcy without further means testing.

The second step in the means test

If your income surpasses the median income for your state, you must proceed to the second part of the means test. This part calculates your disposable income. To calculate this, you deduct specific allowable expenses from your monthly income. These expenses typically include housing costs, transportation expenses and other necessary monthly expenditures.

The final result of these calculations determines your eligibility for Chapter 7 bankruptcy. If you have little to no disposable income after accounting for allowable expenses, you are likely eligible. This is the case for 94% of people who take the bankruptcy means test. However, if there is still a significant amount of disposable income, you may have to file for Chapter 13, which involves creating a repayment plan.