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Understanding Bankruptcy Means Testing

At O1ne Mortgage, we understand that financial challenges can be overwhelming. If you’re considering bankruptcy, it’s essential to understand the means testing process. For any mortgage-related needs, feel free to call us at 213-732-3074.

How Does Bankruptcy Means Testing Work?

Means testing is required for bankruptcy applicants who earn more than the median income for their communities. This test ensures that applicants repay their creditors if they can afford to do so. Those who cannot afford repayment installments may qualify for Chapter 7 bankruptcy, which discharges most debts but may require forfeiture of significant assets. Individuals who can make some payments to creditors are eligible for Chapter 13 bankruptcy, with means testing helping to set the payment amount and term length.

What Information Is Needed for a Bankruptcy Means Test?

To complete the means test forms required for a bankruptcy petition, you must gather the necessary forms and the following information:

• Sources, amounts, and frequency of your income for the six months preceding your bankruptcy filing.
• A detailed list of monthly living expenses, including food, clothing, shelter, utilities, taxes, transportation, and health care.
• Information on median income and living expenses for your community in the time period leading up to your bankruptcy filing.

Median income and cost data are compiled by federal agencies, including the IRS, U.S. Census Bureau, and Bureau of Labor Statistics. The U.S. Department of Justice provides a means testing webpage that guides you to all the necessary resources.

Alternatives to Bankruptcy

Bankruptcy can bring relief but should be considered a last resort. Here are some alternatives:

Credit Counseling

Seek help from a certified nonprofit credit counseling agency. They can review your household cash flow, help you set up a budget, and get back on your feet. If needed, they can help you work out a program with your creditors.

Debt Consolidation

If you anticipate future difficulty paying your bills and your credit is fair to good, debt consolidation could help. Taking out a personal loan, borrowing against your home equity, or transferring balances to a new card with a 0% introductory APR can provide relief from compounding interest charges.

Debt Management Plan

A debt management plan (DMP) is a repayment program organized through a certified credit counseling agency. The agency presents your creditors with a plan to resolve your debts within three to five years.

Debt Settlement or Debt Relief

Debt settlement companies claim they can lower your debt burden by negotiating with creditors on your behalf. However, these companies typically charge high fees and can leave customers with more debt than before. Missed payments can also harm your credit scores.

The Bottom Line

The bankruptcy process in the U.S. includes means testing to ensure that individuals with sufficient earnings repay their creditors. By comparing earnings to median income and expenses with median costs, the bankruptcy court seeks to be fair. If you are subject to a means test, it’s wise to consult a bankruptcy attorney for advice.

For any mortgage-related needs, call O1ne Mortgage at 213-732-3074. We’re here to help you navigate your financial challenges with confidence.

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