As most residents of Vancouver realize, a person can file two kinds of individual bankruptcy petitions: Chapter 7 and Chapter 13. A Chapter 7 bankruptcy proceeding frequently results in all unsecured debts being discharged. A Chapter 13 bankruptcy proceeding is sharply different on this point: the debtor must present a plan to the court for paying off debts over time. If the choice were free, most, if not all filers, would choose a Chapter 7 petition. However, the federal Bankruptcy Act puts a significant barrier in front of persons seeking a Chapter 7 discharge: the means test.
The test is intended to prevent high-income filers from using Chapter 7 to unfairly discharge debts that could be repaid in a Chapter 13 proceeding. If a debtor's adjusted monthly income is below the Washington median income, the person is exempt from the means test and can file a Chapter 7 petition. If, however, the debtor's median income is higher than the state median, he or she or they (if it's a joint petition) must go through a calculation to determine whether a Chapter 7 petition is permitted.
The debtor must first calculate the household's average monthly income over the past six months. The monthly average for 6 months is then multiplied by 12 to arrive at the annual income. The median income levels range from $52,996.00 for a single-person household to $133,570.00 for a 10-member household. Persons with incomes below these levels may file a Chapter 7 petition. Persons with incomes above these levels can only seek relief under Chapter 13. Persons with incomes lower than the income for a one-person household are automatically exempt from the means test, as are veterans who accumulated most of the debt while on active duty.
Anyone contemplating filing a bankruptcy petition may wish to consult a knowledgeable bankruptcy attorney for information about the process and specifically about the effect of the means test.
Source: Washington Bankruptcy Law, "Washington Bankruptcy Means Test,"accessed on Aug. 28, 2017