Last Updated May 18, 2016.
When you’re struggling with debt and don’t know where to turn, it’s time to consider filing a bankruptcy. Bankruptcy still seems somewhat taboo in the modern world, but the reality is that millions of people every year need to wipe their financial slates clean and start over fresh. Bankruptcy exists for exactly that reason. It’s designed to help you get rid of the debts that are dragging you down and start over without the burden of late fees, interest charges, debt collector calls, wage garnishment, and all the other unpleasant side effects of debt. There are 2 main types of consumer bankruptcy to choose from: Chapter 7 and Chapter 13. But you may not have a choice – Chapter 7 is only an option if you pass the Ohio bankruptcy Means Test.
Choosing A Bankruptcy Chapter
One of the first questions you need to tackle when filing for bankruptcy is whether to file under Chapter 7 or Chapter 13. Under Chapter 13, you’ll work with the bankruptcy trustee to create payment plan for the next five years, after which your remaining unsecured debt will be discharged. You’ll also have to repay your secured debt up to the value of the collateral. Chapter 7 bankruptcy is commonly referred to as “liquidation.” In Chapter 7, the bankruptcy trustee will liquidate, or sell, your non-exempt assets to pay back your creditors.
If you have large amounts of unsecured debt and few assets, you might want to file for Chapter 7. However, the court wants to ensure that only those truly in need of Chapter 7 relief file under that chapter. If you can pay back your creditors in a meaningful way, Chapter 7 is not for you. To qualify for Chapter 7 bankruptcy, you’ll have to pass the Chapter 7 “means test” Ohio uses to measure your need.
The Ohio Bankruptcy Means Test for Chapter 7
Step One: Median Income Comparison
The first step of the Ohio bankruptcy means test compares your average monthly income over the last six months to the median income in your state. For cases filed after May 1, 2013, the median income for a single earner in Ohio is $42,814 per year, or $3,567 per month. For larger households, check this chart on the Department of Justice’s website for official median income information. Add up your income over the last six months and divide it by six. If the result is less than $3,567, you qualify for Chapter 7 bankruptcy. If not, you must continue to the next step of the means test.
If you earned more than the median income in your state for the six months prior to filing for bankruptcy, the court is concerned that you might actually be able to pay some of your debts, making liquidation unnecessary and unfair to creditors. To prove that you do, in fact, need to file under Chapter 7, you’ll need to show that you don’t have enough disposable income to make payments under Chapter 13.
Step Two: Disposable Income
Start with your average monthly income from the first step. You’ll subtract your allowable expenses to find your disposable income. Allowable expenses are based on national standards for living, health care, and car ownership costs and local standards for housing and transportation costs. For a single person, national standards allow $583 of living expenses for food, housekeeping supplies, apparel and services, personal care products and services, and miscellaneous expenses. A single person under the age of 65 can also deduct $60 for out-of-pocket medical costs. For a single person in Miami County with a mortgage and a car, you can deduct $788 for housing expenses and $226 for vehicle operating costs. You can also deduct the national standard for car ownership cost, which is $517. You may deduct payroll taxes, childcare expenses, court-ordered payments, and certain insurance expenses. Finally, you may deduct your monthly car and house payments.
After you deduct all of these expenses, you’re left with your monthly disposable income. If it’s less than $125, you qualify for Chapter 7 under the means test. If it’s more than $207, you do not. If you fall between these numbers, you’ll have to complete another step.
Step Three: Disposable Income and Unsecured Debt
Take your monthly disposable income from the first step and multiply it by 60. This figure represents the total amount you could pay to creditors through a Chapter 13 plan. Then, add up all of your unsecured, non-priority debt (credit card debt, medical debt, etc.). Divide the total by four; this is the court’s standard for significant repayment of your creditors. If the first number is less than the second, meaning that you will not have enough disposable income to repay 25% of your unsecured debt over 5 years, you qualify for Chapter 7. If you will have enough to pay the 25%, you’ll have to file under Chapter 13.
Totality of the Circumstances
Calculations aside, the court may examine your Chapter 7 filing by evaluating the totality of the circumstances surrounding your case. For example, you may drive a luxury car and live in big loft downtown; you might qualify for Chapter 7 by the numbers but you don’t actually need it. The court will probably require you to file under Chapter 13 in that situation. On the other hand, you may have more than $207 in official monthly disposable income and still demonstrate your need for Chapter 7 bankruptcy (due to a family or health matter, for example). In that case the court will allow you to file under Chapter 7 even if you fail the Ohio bankruptcy means test by the numbers.
Means Test Exemptions
In certain cases, you don’t have to pass the means test in order to file under Chapter 7. If your debts are not consumer debts (not personal credit card and medical debts, for example) then you don’t have to pass the means test to qualify. You may also skip over the means test if you’re a veteran, you’re disabled, and you incurred the debts you want discharged while on active duty.
Is Bankruptcy Right For You?
You may meet the requirements of the Ohio bankruptcy means test, but that doesn’t mean it’s automatically the best way to deal with your debts. If you have important assets you want to keep, it may be better for you to file under Chapter 13. You may also benefit from other debt management strategies without filing a bankruptcy.
Filing for bankruptcy is complex and you don’t want to make any mistakes. Check out an online means test calculator to see if you might be eligible for Chapter 7 bankruptcy. Before you file, talk to an experienced attorney to make sure you’re filing the right way.