Pass the Bankruptcy Means Test Using These Tactics

Man desperately getting coins from a piggy bank

There are times when filing for bankruptcy is your best choice out of some types of debts. It is also the best way to give yourself a chance to start over and make better financial decisions. However, there are several hurdles to pass and decisions to make before the courts can declare you bankrupt.

Most people opt for Chapter 7 bankruptcy. This takes less time to file compared to Chapter 13, and you can obtain lines of credit within 1-3 years after filing bankruptcy.

One of the elements those without a judgment defense attorney in Salt Lake City will find hard to navigate in Chapter 7 bankruptcy is a means test. All debtors with an above-median income should pass this test. It allows you to subtract secured debt payments and IRS-allowed expenses from your income. If after the subtraction, your pay is less than the median income, you are eligible to file for a Chapter 7 bankruptcy.

Should you fail the means test, you will file for Chapter 13 bankruptcy and be required to repay all your debts within 3-5 years. Here are some strategies a lawyer will use to help you pass the test:

Capitalize on Your Retirement Contributions

There exists a specified maximum limit allowed by the IRS for retirement contributions. When taking the means test, you are allowed to subtract the retirement contributions that are IRS-approved from your total income. If you maximize the amount of your contributions, this will increase your deductions and boost your chances of passing the test.

Make Charitable Donations

Volunteers giving goods to charityWhen taking a means test, the IRS allows the deduction of charitable donations from your income. If you can maximize these donations, then you will, in turn, increase your deductions and get the required threshold for passing your test. The maximum allowable amount for deductible charitable contributions is 15% of your gross pay.

Keep Your Vehicle If You Have a Car Loan

The first instinct when facing bankruptcy is to dump your car. However, this might not work in your favor. If your average car loan repayment or mortgage is higher than the IRS allowance, you are allowed to subtract the higher amount on your test. A means test calculates what you are obliged to pay in your loan agreement for the next five years. This might not work if you will have repaid the loan in full in the subsequent 60 months.

Deduct Your Taxes

If you owe some taxes for the year you are filing for bankruptcy, you are allowed to subtract them in your test. The taxes deducted include local income, as well as state, social security, federal, and FICA taxes. The extent to which this will pull down your median income depends on your location.

The above strategies might not work for all cases because they largely depend on your case’s particulars. Moreover, using them blindly might leave you with costly lawsuits from the state for fraud.

Filing for bankruptcy under Chapter 7 seems like a foolproof plan, but it is far from it. That said, legal representation and advice are essential to help you get a debt discharge.

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