In this article, we discuss how the bankruptcy means test in Illinois works, how to review your assets and expenses, the different forms to use when completing the means test, and what to do if you fail or pass the bankruptcy means test in Illinois.
The bankruptcy “means test” can help you determine if you’re eligible to file for Chapter 7 bankruptcy in Illinois. The “means test” is designed to weed out higher-income earners who probably won’t be eligible for Chapter 7 bankruptcy versus lower-income earners. Higher-income earners can still file for bankruptcy, and may even qualify for Chapter 7 if they have a lot of expenses such as a costly mortgage, car loans, taxes, etc, but they will most likely have to file Chapter 13 bankruptcy. Check out this resource for more information on Chapter 7 versus Chapter 13 bankruptcy.
Most individuals or couples file for bankruptcy because they can’t pay all their bills. Whether this happens suddenly due to unforeseen or catastrophic circumstances, such as losing a job, medical expenses, failing business, etc, or is the result of a slow accumulation of debt due to poor money management, the bankruptcy means test can give you a starting point to determine your eligibility for bankruptcy.
The test is designed to limit the number of people filing for Chapter 7 bankruptcy to those who can’t pay their debts. It calculates disposable monthly income by deducting certain monthly expenses from your current monthly income (over the past 6 months before filing for bankruptcy). Generally, if you have a higher monthly income you won’t be eligible for Chapter 7 and you’ll be expected to pay back your debt by restructuring your loans and payments (This is the point of Chapter 13 bankruptcy).
Another important factor when considering Chapter 7 is looking at your consumer debt versus business debt. If a majority of your debt is business-related you likely won’t take the means test. For those that don’t own a business, this is pretty simple. If you have both consumer debt and business debt you may still be able to file Chapter 7 bankruptcy. Having a qualified bankruptcy attorney can help you navigate the process of bankruptcy, answer any questions you have about the process, and make sure you secure the relief you need.
The first step of the means test is determining whether your income is above or below the median income for your state. This number changes year to year, and your bankruptcy attorney can help verify all your numbers. As of writing this article, Illinois’ median household income is $63,575.00, according to the US census.
If you earn more than the median you will need to sit down and more thoroughly calculate your income versus expenses and see if you can work out a repayment plan to pay down your debt. If you learn less than the median monthly income in Illinois for a household of your size, you’re done. You’ve “passed” the means test and should be eligible for Chapter 7 bankruptcy.
The first question you should ask yourself is if you really tighten the belt on your monthly purchases do you have enough income after your allowed monthly expenses to pay off some of your unsecured debt (credit cards)? If after going through the calculations and you find your disposable income is too high you fail the means test and are not eligible for Chapter 7 bankruptcy. If you still feel you should be eligible, or you’re just not sure you should speak with a bankruptcy attorney.
Form122A-1: This is the first form for the means test and determines if your median income is below the median household income for the rest of the country.
Form 122A-2: This form is the second part of the means test and is to be used if your income is above the state median.
Form 122A-1Supp: This form is only for certain groups, such as veterans or military personnel, who may not have to take the means test at all. For more information on this speak with a qualified attorney.
First off, when you look at your income you will be using the last 6 months leading up to the bankruptcy filing date. If your income doesn’t fluctuate from month to month then timing isn’t so important. However, for those who may have worked a lot of overtime recently, or those about to receive a bonus, the timing of filing for bankruptcy can determine your eligibility. An individual who is eligible for Chapter 7 in March, may not be eligible come April if they receive a bonus or get an unusually large paycheck from overtime work.
Determining your gross income can be difficult if you’re a business owner, but if you’re a wage earner or salaried employee it should be pretty straightforward. Gross earners are what you make before anything is taken out of your paycheck for taxes, insurance, etc. Other sources of income that should be included in the means test are:
When looking at expenses, those who make more than the median household income may still qualify for Chapter 7 if the means test reveals they don’t have enough disposable income to pay 25% of their unsecured nonpriority debt over a period of up to 5 years. This is not as straightforward as it sounds, and each state, and sometimes county, has its own guidelines determining what amount qualifies and what does not.
The types of expenses to be included in the second part of the means test fall into one of 4 categories.
If after going through all the calculations and it is determined that there is not enough income to cover 25% of your unsecured debts over a 5 year period you should be eligible to file for Chapter 7 bankruptcy.
Passing the means test based on your calculations doesn’t guarantee that you’ll be able to file Chapter 7 bankruptcy. The court will review your case and after looking at your income versus expenses and all other factors determine if Chapter 7 vs Chapter 13 is the best option.
If you don’t pass the means test you’re left with filing Chapter 13 bankruptcy. Chapter 13 restructures your debt into a strict 3-5 year payment plan monitored by the court.
Before filing bankruptcy it is highly suggested that you speak with a qualified bankruptcy attorney. You may think that you don’t qualify for Chapter 7 bankruptcy when you actually do, or there may be better options for your particular situation.
O'Flaherty Law is happy to meet with you by phone or at our office locations in: