The Means Test — Filing Bankruptcy While Earning A Good Paycheck

For those who have lost jobs or suffered health problems that limit their earning power, bankruptcy relief is often an obvious choice. But what about those who struggle with various financial crises while still earning a good paycheck? Is there a bankruptcy option for you? The answer is yes.

Figuring out what those options are begins with something known as the means test. What is the means test? And how can you improve your chance of passing it? Here are a few answers. 

What Is the Means Test?

The means test set up in the U.S. Bankruptcy Code determines who is eligible for Chapter 7 bankruptcy, or the liquidation of assets and full debt discharge. It has two stages — first, a measurement of straight income and second, the deduction of living expenses. If you do not pass the means test, you can still file Chapter 13 bankruptcy, which is a repayment plan. 

What Are the Two Steps of the Means Test?

The first part of the means test is taken by every potential claimant. If your income falls below the median income where you live, you automatically qualify for Chapter 7. This amount varies by state, though, so don't rule out your own income too soon. A debtor earning $70,070 in the District of Columbia is treated the same as one who earns $53,731 in Nevada. 

If you don't automatically pass the first stage, you can then perform an additional calculation in the second stage. In this portion, you may deduct certain living expenses and see if you fall under the income limitations.

First, you may deduct national and local standard amounts (based on household size) for things like food, clothing, utilities, mortgage or rent, and household goods. In addition to the standard amounts, you may also be able to deduct your actual income taxes, mandatory work deductions, life insurance, court-ordered support, and child care. Depending on your personal circumstances, these can add up. 

Where Should You Start?

Because the means test is a vital part of getting the right bankruptcy relief, it's important to complete it correctly. The forms can be long and your specific allowed deductions may vary. The best chance a higher-earning debtor has to pass is with the assistance of an experienced bankruptcy attorney.

Learn more about the means test and all the other stages of seeking the bankruptcy chapter that will best bring you financial stability by contacting a bankruptcy attorney today.