When you decide to file for bankruptcy, you must decide to file for Chapter 7 or Chapter 13. The chapter that works best for you will depend on your debt and income. But if you choose to file for Chapter 7, you must first pass the means test.
In 2005, a means test was added to bankruptcy proceedings. When a person files for Chapter 7, this test makes sure that the person has no way to pay off creditors in Chapter 13.
The two steps of the means test
The means test has two main steps. In the first step, you compare your income to the median income of all Florida residents. The Department of Justice tracks median income for each state. If your income falls below the median level, you can file for Chapter 7.
However, if your income is above Florida’s median, you can move to the second step of the means test. In this step, you add up certain allowable expenses that take away from your income. Then you subtract these expenses to show how much disposable income you have. A court may allow you to file for Chapter 7 if you can show you don’t have very much disposable income.
Why you must use the means test
When you have multiple debts, and your income won’t pay them off, Chapter 7 can discharge some of those debts so that you no longer have to pay them.
But to prevent people from misusing Chapter 7, a new law added the means test in 2005. This law pushes people with high debt but plenty of income towards Chapter 13. Anyone filing for Chapter 13 pays off all their debt with a repayment plan. But with Chapter 7, people can have some of their debt discharged so they no longer have to pay it.
When you file for bankruptcy, you will go through all your debts and income and decide whether to file Chapter 7 or Chapter 13. The means test will also decide which chapter you can file.