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How does the means test for Chapter 7 bankruptcy work?

Chapter 7 bankruptcy is an excellent debt resolution strategy that can help people in various circumstances. Unlike Chapter 13 bankruptcy, in Chapter 7 bankruptcy, individuals resolve their debts by gathering non-exempt assets, liquidating them and using the proceeds to pay back creditors to the extent that is possible. Once creditors are paid as much as possible, the debts are resolved and creditors are not permitted to try and seek payment on them again.

As for who is eligible for Chapter 7 bankruptcy, the debt holder must be either an individual person, a partnership, a corporation or another kind of business entity. The debtor must also pass what is called a "means test" if his or her current monthly income is above the state median income. In order to pass the means test, the debtor's average current monthly income for the past five years (minus certain allowable expenses) must be below $12,475, or it must be less than 25 percent of the total non-priority unsecured debt possessed by the debtor -- if the amount of the debt is over $7,025.

If the debtor fails the means test, it is possible to appeal the failure if special circumstances can be shown -- special circumstances that would allow for additional expenses and adjustments to be made to the debtor's current monthly income. In most cases, if the appeal is not successful, then the bankruptcy can be converted to Chapter 13 bankruptcy.

By speaking with a bankruptcy lawyer, Ohio residents suffering from debt issues can get a sense for whether they will likely pass a Chapter 7 means test. They may also be able to determine if Chapter 7 is an appropriate fit for their situations, or if another kind of debt resolution strategy would be more appropriate for them.

Source: United States Courts, "Chapter 7 - Bankruptcy Basics," accessed Sep. 29, 2015

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