How to Pass the Means Test for Chapter 7 Bankruptcy in Pennsylvania
Bankruptcy is not a one-size-fits-all package, but instead, is divided into “chapters” named for the U.S. Bankruptcy Code. Most consumers file under either Chapter 13 or Chapter 7, while Chapter 11 is usually used by businesses. Chapter 7 is especially popular among consumer filers because it is faster, simpler, and less financially burdensome than Chapter 13. But before you can file under Chapter 7, you need to pass something called the “Means Test.” Our New Jersey bankruptcy attorneys explain how to improve your chances of qualifying for Chapter 7.
What is Means Testing?
There are a few different types of bankruptcy. Chapter 13 is meant for filers who can gradually pay back most of their debts, while Chapter 7 is meant for filers with a greater need for debt relief. In order to help ensure that Chapter 7 is not abused by debtors who can accommodate filing under Chapter 13, the government requires prospective Chapter 7 filers to prove that they have financial need. This is where the Means Test enters the picture.
Unlike most other aspects of bankruptcy, Means Testing is actually fairly simple. The Means Test compares your income against the median income for a household of equivalent size in the state where you live. If your income is lower, you qualify for Chapter 7. But if your income is higher — meaning you can afford to pay back your debtors with a Chapter 13 reorganization plan — you will not qualify for Chapter 7.
The Department of Justice reports the following Pennsylvania median income levels by family size, applicable to cases filed on or after November 1, 2014:
- 1 Earner — $48,200
- 2 People — $56,946
- 3 People — $71,703
- 4 People — $84,396
If your household is larger, simply add $8,100 per each extra person.
For some people, Chapter 13 does prove to be the savvier financial option. But if you’re determined to file under Chapter 7, you may be able to pass the Means Test by deducting certain expenses.
Expenses You Can Deduct
Filing under Chapter 13 requires that all of your disposable income goes towards your repayment plan to pay off your debtors, with payments spread out over the course of three to five years. If you fail the Means Test because you have a large amount of disposable income, and you want to qualify for Chapter 7, you will need to prove that your expenses are also high, effectively eating away so much of your disposable income that you cannot realistically afford to cover the Chapter 13 repayment plan.
You may be able to deduct the following expenses:
- Caregiver Expenses – This includes expenses related to caring for elderly, disabled, and chronically or terminally ill individuals. If you care for an aging parent, for example, you can deduct related expenses such as prescription medications or transportation costs.
- Charity Donations – If you regularly donated to charities before filing, and plan on continuing to do so, you can deduct your donations and contributions. Be advised you will be required to provide documentation proving a record of making contributions.
- Child Care – The federal government recognizes that providing for young children can be expensive, and debtors are permitted to deduct child care expenses such as babysitting and day care costs.
- Domestic Support – This includes spousal support (i.e. alimony) and child support payments.
- Education for Disabled Children – If your child has a mental and/or physical disability, you can deduct expenses related to his or her education.
- Insurance – This includes health insurance, disability insurance, and term life insurance.
- Involuntary Employment Expenses – These include mandatory deductions from your paycheck, like union dues or fees for having a uniform.
- Secured Debt – Secured debts are debts which are “secured” by collateral, such as a mortgage (secured by your home, which can be foreclosed on) or an auto loan (secured by your car, which can be repossessed). You may be able to deduct your secured debts in full, depending on how long they will take you to pay.
- Taxes – Income tax obligations may be deducted.
Call Our Pennsylvania Bankruptcy Lawyers to File Chapter 7
You may also be able to deduct miscellaneous expenses that go toward maintaining your family’s overall health, welfare, and safety. If your family is going through an emergency, you might even be eligible for a hardship discharge. However, you must be able to justify your deductions in court. Your attorney can advocate for your best financial interests before the judge and fight to get you as many permissible deductions as possible.
To start discussing whether Chapter 7 is right for you in a free and confidential legal consultation, call the Pennsylvania bankruptcy lawyers of Young, Marr & Associates at (215) 701-6519 in Pennsylvania. Our team has more than 20 years of experience filing thousands of cases.