Unfortunately, there are many misconceptions about the bankruptcy process, including the belief that many hold that you can simply declare bankruptcy and receive relief. However, in reality, this is a complicated legal process that requires careful consideration and Columbus Chapter 7 bankruptcy lawyers to guide you through these matters. If you are interested in Chapter 7, you’ll need to understand what the means test is and how to pass. Essentially, this determines whether or not you are eligible for Chapter 7 bankruptcy by utilizing a two-step formula to compare your income to the median income in your state, or determine eligibility after deducting qualifying expenses. As such, if your income is below Ohio’s median, you may qualify for this type of bankruptcy. The following blog explores what you should know about these matters.

How Does Chapter 7 Bankruptcy Work?

If you are interested in filing for bankruptcy, it’s important to understand your options. Generally, one of the most common bankruptcy options is Chapter 7. This is a liquidation process that involves the seizure and sale of non-exempt assets to repay creditors, with the vast majority of dischargeable debts erased at the end of this process.

The primary purpose of this process is to ensure that individuals who have the means to do so repay their debts. This prevents others from taking advantage of the bankruptcy process by leaving this Chapter for those who need it.

However, it is important to understand that Chapter 7 does require filers to meet the eligibility guidelines to pursue this option. As such, those who do not pass the means test generally pursue Chapter 13 bankruptcy instead, which is a reorganization plan that lumps all debt into one expense, which is then paid in monthly installments over three to five years.

What Happens During Chapter 7?

  • A bankruptcy trustee is assigned to review and oversee your case
  • Non-exempt assets may be seized and sold to repay creditors
  • Most unsecured debts, like credit card balances, medical bills, or personal loans, are eligible for discharge
  • The process generally takes three to six months from filing to discharge
  • You must complete the required credit counseling and financial education courses

What Is the Means Test and How Do I Pass?

The means test is a process used for eligibility for Chapter 7 bankruptcy filers. Essentially, this process compares your household income to that of other households of the same size in Ohio. If you earn less than the average annual income for comparable-sized households, you can pursue this chapter. However, if you earn too much, you may be ineligible for this option. Generally, the test will then examine your disposable income by removing your allowed expenses, which include food, housing, utilities, and transportation. If your disposable income is below the median, you are eligible to pursue Chapter 7.

How the Chapter 7 Means Test Works

  • Step 1. Compare your income to households of similar sizes in Ohio
  • Step 2. If your income is above the median, deduct eligible expenses
  • Step 3. If your disposable income is low enough, you may still be eligible for Chapter 7

The means test will examine your income and assets to determine if you fall below the median income level. Generally, the test will examine your child support, unemployment benefits, tips, rental property income, retirement income, bonuses, and 1099 income. You should note that Social Security retirement income, Social Security disability income, and Supplemental Security income will not be taken into consideration, as these are considered exempt during bankruptcy.

Who Qualifies for Chapter 7?

  • Your income is below Ohio’s median income for households of your size, OR
  • Your disposable income is low after allowed expenses
  • You pass the second part of the means test, which involves expense analysis
  • You have not filed Chapter 7 in the last 8 years
  • You have completed the required bankruptcy counseling

What Income Is Included in the Means Test?

  • Child support
  • Unemployment benefits
  • Rental property income
  • Retirement benefits
  • Independent contractor income
  • Tips and wages

What Income Is Not Counted?

  • Social Security income, including:
    • Retirement income
    • Disability income
    • Supplemental Security Income (SSI)

What Expenses May Be Deducted?

  • Housing and mortgage payments
  • Utilities (electric, gas, and water)
  • Food and household supplies
  • Transportation and vehicle costs
  • Health insurance and medical expenses
  • Taxes and mandatory payroll deductions

What Happens if You Fail the Means Test?

If you fail the means test, you may worry that this will prevent you from pursuing bankruptcy altogether. However, this simply means that Chapter 7 may not be available, but there are additional options you may want to consider.

Alternatives to Chapter 7

  • Filing for Chapter 13 (reorganization repayment plan)
  • Recalculate expenses to ensure you have included all possible deductions
  • Wait to refile once your income changes
  • Consider debt settlement or negotiation

Ohio-Specific Considerations for the Means Test

If you are filing in Columbus or anywhere in Franklin County, your eligibility will be determined based on the median income for households of your size in Ohio in accordance with federal bankruptcy rules.

The median household income data changes periodically and are specific to Ohio, making local legal representation imperative for filers in Columbus and Franklin County.

Why Location Matters

  • Median income levels will vary based on both state and household size
  • Ohio-specific data determines your initial qualification
  • Local cost of living will impact allowable expenses
  • Filing in the correct jurisdiction ensures compliance with bankruptcy laws

Contact an Experienced Franklin County Bankruptcy Attorney Today

Navigating bankruptcy can be incredibly difficult, as there are many important considerations you must make. Additionally, if you make an error during this process, you’ll find that it can impact the outcome of your case. As such, it is critical to connect with an experienced Franklin County attorney with Cousino & Weinzimmer LLC to help you through these difficult matters. Our team is dedicated to helping our clients reap the full benefit of this process. Contact us today to learn more.