Chapter 7 bankruptcy gives consumers in Columbus, Ohio, a legal way to remove burdening debt they can no longer handle. Only unsecured debts, such as medical and credit card debt, can get erased in bankruptcy. The secured debts, those that are backed by collateral, are paid through the selling of assets. However, a debtor must pass a means test to qualify to file for Chapter 7.

How the means test works

The means test determines a debtor’s eligibility for Chapter 7 by using a two-step process. It doesn’t mean a debtor needs zero or little income to file, and he or she still may qualify with higher wages.

The first part of the test compares a person’s median income for the past 12 months to a similar household size in the same state. A debtor with income that falls below the median income passes with no further testing needed. If an individual doesn’t pass the first part of the test, he or she must continue with the second step, which calculates his or her disposable income after allowed expenses.

A debtor with a higher income could still pass the test using allowable expenses outlined by the IRS. If the expense doesn’t meet the requirements, the debtor must justify it.

Means test exemptions

There are still a few exemptions available to debtors who fail the means test. Bankruptcy only covers consumer debt, so debtors with 50% or more business debt aren’t required to take the means test. Business debts include expenses such as vendor debts and loans on vehicles used for business.

National Guard and Reservists deployed for active duty for a minimum of 90 days after September 11, 2001, may get an exemption. Disabled vets with at least a 70% disability rating and accrued debt during service could also qualify for a means test exemption.

Chapter 7 bankruptcy is commonly straightforward, but it involves filing out complex paperwork that needs to be correct to avoid dismissal. Chapter 7 remains on a credit report for several years, so a debtor should seek legal advice before filing.