The means test is based on a very simple foundation, which is to prevent the misuse of the bankruptcy laws that were intended to protect the poor and those who really require it.
However like any law, it also needs to be protected to ensure that it is providing protection to those who require it rather than those who are able to take advantage of it. The means test checks if people are eligible to apply for bankruptcy under chapter 7 of the bankruptcy act, which in layman’s terms amounts to total protection from creditors, baring a few circumstances and exceptions.
The laws that one looks to for bankruptcy are chapter 7 which provides comprehensive protection, and in certain circumstances waves off the debts. The other law which is in effect people can apply for is chapter 13 which enables breathing space from creditors, this enables debtors to negotiate with creditors under the supervision of a judge who will then ensure that the proceedings are fair to both sides. However, under section 13 the person who has applied for protection would still require to pay back the entire amount.
The only difference with getting protection under chapter 13 is that the person who has applied is also eligible for the luxury of time to get their finances in order, while a stay is put on the assets of the debtor. This enables the debtor to get back on track.
The way in which the means test works is simple, it compares the income of the applicant to the average income of the state. If the income of the applicant is less than that of the state average, then they would most probably be eligible for chapter 7 of bankruptcy. This is a test which is designed to prevent the misuse of the bankruptcy laws by those who hope to use it to their advantage.
There are other factors that also influence the outcome of a means test and some of those are the allowed amounts from a person’s expenses for living expenses, such as food and other basic necessities. In addition to this the size and the location of the home of the applicant is also a factor which is looked into in greater detail.