Before you can file for Chapter 7 bankruptcy relief in Milwaukee, you must first complete the “means test”. The means test is utilized to establish whether or not you are eligible for bankruptcy relief under Chapter 7. The purpose of the means test is to look at your debts, income, and assets. Because bankruptcy relief under Chapter 7 is such an effective tool for expunging debt, courts want to confirm that it is only being used by individuals who are unable to pay their debts.
The means test is split into two parts. Both of the parts concentrate on your income and expenses.
A Summary of the chapter 7 bankruptcy “Means Test” is as follows:
- Compare your monthly income to the Wisconsin median income
- Calculate your disposable income over the upcoming five years
- Multiply your outstanding unsecured, non-priority debts by .25
The first part compares your monthly income to your household size and median income for Wisconsin.
If you’re monthly income meets, or is below the median income level for Wisconsin, the means test is over and you can file your Chapter 7 bankruptcy petition.
How Does the Court Determine My Income? In order to calculate your annual income, the court looks at your previous six months’ income and multiplies it by two. The U.S. Trustee’s Office updates the median income levels typically twice a year based on the latest data.
If you’ve recently experienced a reduction of income or job loss, you wish to consider waiting a few months before you file, as this could significantly lower your annual income under the means test.
Step 2: Allowable Expenses
The second part of the test calculates your disposable income to determine eligibility. If under the first part of the test your income was greater than the median for Wisconsin, you may still be able to file under Chapter 7 by deducting allowable expenses. Some allowable expenses (based on IRS Standards) include housing costs and utilities.
The remaining income after deduction of allowable expenses is your disposable monthly income. Your disposable monthly income is then multiplied by 60 to determine your disposable monthly income over the next five years. Generally, if your disposable monthly income over the next five years is less than $6,000, you have passed the means test and may file for bankruptcy relief under Chapter 7.
If your disposable monthly income over the next five years is over $10,000, there is a presumption of abuse and you cannot file under Chapter 7. You would be eligible to file bankruptcy under Chapter 13. Further, you will be given an opportunity to include additional allowable expenses to reduce your monthly income.
However, if your total disposable income for the five-year period falls somewhere between $6,000 and $10,000, then you must make one more calculation under the second step.
Step 3: Qualifying
In this final step you take your expected disposable income over the next five years that was between $6,000 and $10,000, and you compare it to your total of non-priority unsecured debts.
If after comparing your total non-priority debts, your disposable income is less than 25%, there is no presumption of abuse, and you qualify to file for bankruptcy relief under Chapter 7.
Even if you pass the means test under any of the steps, the fact remains that your bankruptcy trustee can still throw your case out for abuse if he or she deems that your particular case warrants it.
In any case, our bankruptcy lawyers can offer you guidance as to what kinds of circumstances may cause your bankruptcy trustee to challenge or dispute your case.
Call us for a free in- person consultation today at 414-482-8000.