Michigan’s Means Test: Qualifying for Chapter 7 Bankruptcy

Bankruptcy is a legal tool designed to relieve individuals from overwhelming debt. It can offer a fresh start for those struggling to meet their financial obligations. However, the thought of bankruptcy often invokes fear and uncertainty. Many Michigan residents worry about losing their homes, vehicles, or personal belongings. These fears, though understandable, can usually be alleviated with a clear understanding of the process.

One crucial step for those considering Chapter 7 bankruptcy is the means test. This test determines eligibility and ensures that Chapter 7 is the right solution for your financial situation. Understanding the means test can help you through the process confidently and make informed decisions about your future.

What Is the Means Test?

The means test is a financial assessment required for individuals seeking to file for Chapter 7 bankruptcy. Its primary purpose is to prevent abuse of the bankruptcy system by ensuring that only those who genuinely cannot repay their debts qualify for Chapter 7. For many, it’s a necessary step toward debt relief.

Under Chapter 7 bankruptcy, many unsecured debts, such as the balances on your credit cards and medical bills, can be discharged. This form of bankruptcy is intended for those with limited financial means. The means test evaluates your income and expenses to determine whether you can repay some of your debts through a Chapter 13 repayment plan.

In Michigan, Chapter 7 bankruptcy is a popular choice for individuals and families overwhelmed by debt. Rising living costs, medical expenses, or unforeseen financial hardships can make it difficult to keep up with bills. The means test acts as a gatekeeper, ensuring that Chapter 7 is reserved for those who need it most.

How the Means Test Works

The means test involves a detailed evaluation of your financial situation, comparing your income and expenses against specific thresholds. Here’s how it works:

Step 1: Calculating Household Income

The first step in the means test is to calculate your household’s average income over the past six months. Average income includes wages, business income, rental income, and other sources. Irregular income, such as bonuses or overtime, must also be accounted for. Social Security benefits, however, are typically excluded.

Step 2: Comparing Income to Michigan’s Median Levels

Once your average income is calculated, it will be evaluated against the median income for households of similar size in Michigan. The U.S. Census Bureau periodically updates these figures. Suppose your income falls below the state median. In that case, you automatically qualify for Chapter 7 bankruptcy without the need to continue and complete the rest of the test.

Step 3: Determining Disposable Income

If your income exceeds the state median, your next action will be to calculate your disposable income. This calculation consists of subtracting all allowable expenses from your average income.

Housing, utilities, transportation, and healthcare expenses are factored in calculating disposable income. The amount left over after deducting these expenses is your disposable income. If this amount is below a specific threshold, you may still be eligible to file Chapter 7 bankruptcy.

The legal basis for the means test is outlined in 11 U.S.C. § 707(b), which outlines the requirements and methodology for determining eligibility.

Who Needs to Take the Means Test?

Not everyone seeking bankruptcy needs to complete the means test. Certain exemptions apply, so determining whether the test is necessary in your case is essential.

The following exemptions apply to the means test:

• Primarily Business Debts: If most of your debts are related to business activities rather than personal expenses, you may be exempt from the means test.
• Military Service Members: Certain active-duty military personnel and disabled veterans may qualify for an exemption under specific conditions.

Calculating Allowable Expenses

Allowable expenses play a significant role in determining whether you pass the means test. These expenses are based on IRS guidelines and are designed to reflect reasonable living costs. When determining disposable income, allowable expenses are deducted from your monthly income, reducing the amount available to repay debts. If the remaining disposable income is below a specific threshold, you may qualify for Chapter 7 bankruptcy.

Common allowable expenses include:

• Housing: Rent or mortgage payments, property taxes, and insurance.
• Transportation: Costs related to car loans, fuel, and maintenance.
• Medical Costs: Necessary healthcare expenses not covered by insurance.
• Utilities: Electricity, water, heating, and other essential services.

By including these allowable expenses, the means test ensures that only realistic and reasonable amounts of disposable income are considered for debt repayment. Under 11 U.S.C. § 1325(b)(2), these expenses must be reasonable and necessary to support your household. Regional cost-of-living differences may influence allowable amounts for Michigan residents, meaning your expenses must align with local standards. Accurate accounting of these expenses is critical to passing the means test.

What Happens If You Fail the Means Test?

Failing the means test does not mean you are out of options. Several alternatives are available for those not qualifying for Chapter 7 bankruptcy.

Chapter 13 bankruptcy involves a repayment plan where you pay off a portion of your debts over three to five years. This option can allow you to retain assets, such as your home or car, while you address your other financial obligations.

You can improve your eligibility in the following ways:

• Reassess Income and Expenses: Adjusting your budget or documenting additional allowable expenses can impact the outcome of the means test.
• Seek Professional Guidance: An experienced bankruptcy attorney can help identify overlooked exemptions or errors in your means test calculations.

Exploring these alternatives ensures you can still achieve financial relief, even if Chapter 7 is not immediately available.

Common Mistakes to Avoid During the Process

Navigating the means test and the bankruptcy process requires precision. Avoiding common mistakes can save time and prevent complications.

• Mistake 1: Under-reporting or Over-reporting Income: Accurate income reporting is essential. Underreporting income can lead to fraud allegations, while over-reporting may unnecessarily disqualify you.
• Mistake 2: Failing to Account for All Allowable Expenses: Failing to include all eligible expenses can negatively impact your disposable income calculation. Ensure that every allowable cost is documented.
• Mistake 3: Misunderstanding Michigan-Specific Cost-of-Living Factors: Michigan’s regional variations in housing and utility costs can affect your means test results. Working with a local expert ensures these factors are accurately accounted for.

Contact Sigal Law Firm for Bankruptcy Guidance

Filing for Chapter 7 bankruptcy is a significant decision, and understanding the means test can be challenging without the right support. The team at Sigal Law Firm has extensive experience helping Michigan residents understand their bankruptcy options and achieve financial relief. Let us help you take the first step toward a brighter financial future.

We are dedicated to guiding clients through the means test process, ensuring accuracy and compliance with state and federal laws. Whether you qualify for Chapter 7 or need to explore alternatives like Chapter 13, we’re here to help.

Call Sigal Law Firm at 248-671-6794 today to schedule a consultation with an experienced bankruptcy attorney.