What to know about the means test

New Jersey residents and others who are looking for debt relief may be able to obtain it by filing for Chapter 7 bankruptcy. However, individuals may need to pass a means test to find out if they are eligible to do so. The purpose of the means test is to determine if a person has disposable income that can be used to pay down existing debt balances.

It takes a look at a debtor’s income over the past six months and compares to the median in the state where that person resides. If a debtor’s household income is less than the state median, that person has passed the means test. However, even if an individual’s household income exceeds this threshold, it may still be possible to qualify for Chapter 7 bankruptcy. This may be true if an individual lacks sufficient disposable income.

When determining a person’s disposable income, it may be possible to deduct certain expenses such as rent, medical expenses and groceries. An individual may also be able to deduct a car loan payment or the cost of buying clothes. Those who fail the means test will be required to file for Chapter 13 bankruptcy and repay creditors over a period of three or five years. In some cases, it may be in a person’s best interest to file for Chapter 13 bankruptcy even after passing the means test.

By filing for Chapter 7 bankruptcy, a debtor may be able to obtain an automatic stay of creditor contact or other collection activities. It may also be possible to eliminate some or all unsecured debt balances without making any payments to creditors. An attorney may be able to talk about the process of filing for Chapter 7 bankruptcy and provide details about passing the means test.

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