When debtors in North Carolina see no way out of debts, they may file for bankruptcy, a legal process to discharge certain unsecured debts. Some unsecured debts discharged in bankruptcy include credit card bills, payday loans, and medical debt. Many filers choose Chapter 7 since it discharges faster, but debtors must also pass a Means Test to qualify.
Means Test basics
The Means Test determines a filer’s eligibility for Chapter 7 bankruptcy, which requires the selling of non-exempt assets. In 2005, Congress passed the Bankruptcy Abuse and Consumer Protection Act because people who could afford the debt took advantage of the system.
Even if they lose non-exempt assets, they no longer owe the debt after the discharge. The presumption of abuse may arise if the debtor has sufficient income to pay at least a portion of the debt.
The Means Test compares a filer’s income from the last six months to the average income of a household of the same size, which excludes the month that the debtor filed. If the debtor falls below the median income, he or she may qualify with no further testing needed. The court may also adjust the income for predicted upcoming changes or current changes, such as a new job.
Exceptions and exemptions
Debtors who have enough disposable income at the end of the month do not qualify for Chapter 7. They may still file under the presumption of abuse, but they must prove they are not abusing the system. Many filers fail the Means Test because they include unnecessary or expenses that don’t meet IRS standards when figuring income.
Debtors with higher incomes could still pass the test if they meet some exemptions. Disabled vets with a disability rating of at least 30% may get an exemption from the Means Test if they accrued debt on active duty. The non-consumer debt exemption could apply to business debts more than 50% of total debt.
A debtor should carefully consider personal bankruptcy since it does not erase all debt. A lawyer may be able to analyze your case and determine the correct type of bankruptcy to file.