For most people who think of bankruptcy, Chapter 7 is what comes to mind. Filing Chapter 7 bankruptcy allows those in debt to discharge their debts without a repayment period. There is also Chapter 13, which allows a person overwhelmed by debt to work with creditors. By creating a workable payment plan with a time limit, Chapter 13 allows for repayment and debt forgiveness for those who don't qualify for Chapter 7 bankruptcy.
Generally speaking, in order to file for Chapter 7 bankruptcy, an individual must pass what is known as a means test. Those who can't pass the means test will generally need to consider Chapter 13 instead of Chapter 7. Understanding the means test makes it easier to determine what kind of bankruptcy protections could work for your situation.
The means test looks at average state income
In the context of this test, the definition of mean is average. Basically, in order to pass a means test, the person considering bankruptcy needs to have an income from the last six months that falls below the state mean income. Of course, there are deductions for certain expenses, including rent or a mortgage payment, among others. For those who are close to the mean for their household size, there are calculators that can help determine if Chapter 7 bankruptcy is an option.
The mean income for a household in New York, based on 2015 data, is roughly $86,825. Whether or not you fall below the mean cutoff will depend on the size of your family and your income over the last six months. It will also depend on how you spend your income and the amount of debt you're carrying.
Why is there a means test for bankruptcy?
It may seem strange that people who can no longer manage their debt have to take a test to see if they can qualify for bankruptcy protections. However, this practice should help protect lenders from people who might frivolously claim to need debt relief when their income is high enough to make payments.
That's why the calculations look at how people spend money, as well as income. Some people and families have unusual and expensive medical needs. Others may carry an abnormally high level of debt. Looking at all information helps ensure that those with little disposable income receive the debt relief and bankruptcy protections they deserve.
As with many government protections and programs, the concern for fraud or abuse by a few has led to limitations, tests and piles of paperwork for even those who are most obviously in need. Just the test and work required for bankruptcy can frighten some people away from seeking protections that could help them work toward a better financial future.