Course: Fundamentals of Financial Planning
Lesson 4: Managing Cash Flow and Debt

Student Question:

I’m making sure I understand the means test. If the person is trying to file Section 7 to get rid of debt but the means test shows they can cover their allowable expense, will they be forced to file Section 13 and have to do a repayment plan? It appears the means test is there to help protect the lenders and keep the number of Section 7 filers down.

Thanks

Richard


Instructor Response:

Hi Richard,

Your understanding is correct.  

  • It’s no longer enough to have liabilities exceed assets when petitioning for a Chapter 7 Liquidation; the petition will generally not be granted if the individual (petitioner) has the means (income > expenses) to pay off the debts, or at least a portion of them, over time. 
  • However, a petitioner denied a Chapter 7 Liquidation because of the means test could certainly petition the court for a Chapter 13 Reorganization.

The net result, as you suggest, is to reduce the number of Chapter 7 liquidation bankruptcies.

Onward and Upward,

Bruce