Chapter 7 Means Test

The means test helps determine your disposable income and your eligibility for filing for bankruptcy protection. The test deducts certain monthly expenses from your current monthly income based on your average income in the six months before bankruptcy. This determines your monthly disposable income. If your disposable income is too high, you may not qualify for Chapter 7 bankruptcy.

You may still be able to file Chapter 13 bankruptcy if you don’t qualify for Chapter 7. However, there are benefits and drawbacks to any bankruptcy. To get more information about filing bankruptcy, talk to a local bankruptcy attorney for legal advice.

Completing the Bankruptcy Means Test

The means test is an objective calculation under the U.S. Bankruptcy Code. The means test was passed into law by the Bankruptcy Protection Act of 2005. Previous bankruptcy law often made it fairly easy for filers to meet the Chapter 7 criteria, giving bankruptcy courts plenty of discretion in determining eligibility. Today most filers must pass the bankruptcy means test to qualify for Chapter 7 debt relief.

The official Chapter 7 Bankruptcy means test form and calculation instructions are available on the U.S. Bankruptcy Court’s website. As outlined below, the test lays out what income is considered and how that calculation is compared within your state to determine if you “pass” or “fail” the Chapter 7 means test.

Step 1: Calculate Your Means Test Income

For the Chapter 7 means test calculation, your income can include the following sources:

• All wages, salary, tips, bonuses, and commissions
• Workers’ compensation
• Unemployment compensation
• State disability insurance
• Pension and retirement income
• Rental and real property income
• Gross income from a business, profession, or farm
• Child support, alimony, or spousal support
• Interest, dividends, and royalties
• Annuity payments

The income calculation generally does not include income from the following sources:

• Social Security retirement benefits
• Tax refunds
• Social Security Disability Insurance
• Supplemental Security Income
• Temporary Assistance for Needy Families

Step 2: Compare Your Income to State Median Household Income

The test then determines if your current monthly income is less than the median income for a household size in your state. If so, you typically pass and can file for Chapter 7. The U.S. Census Bureau provides information on the average household income by family size in your state. You can also get median income information from the Office of the U.S. Trustee under the Department of Justice.

If you pass the means test at this stage, you are technically eligible for filing bankruptcy under Chapter 7. If you do not pass, you must complete the next portion of the means test to determine exemptions that might apply to your situation.

Step 3: Do Means Test Exemptions or Special Considerations Apply?

If you make more than the state’s median annual income, you may still qualify for Chapter 7 bankruptcy under certain circumstances.

In this portion of the means test, certain household expenses are subtracted from the income to determine if you meet the requirements.

The income left after the deduction of the allowable expenses (actual and standardized expenses) must be less than what would be required to complete a repayment plan under Chapter 13 bankruptcy. If not, then you do not qualify for Chapter 7.

What if I Fail the Bankruptcy Means Test?

Just because you passed the means test doesn’t automatically qualify you to file for Chapter 7 bankruptcy. The trustee or court may come to a different conclusion. If you have enough income remaining to pay something to your creditors, the court might convert your Chapter 7 case to a Chapter 13 bankruptcy.

A debtor who fails the means test has the right to file for Chapter 13 bankruptcy. Chapter 13 places a filer’s debt in a five-year repayment plan. The plan must include the repayment of mandatory debts, such as priority debts and secured debts, and a portion of debts owed to nonpriority, unsecured creditors.

Can I File for Chapter 7 if I Fail the Bankruptcy Means Test?

If you do not pass the bankruptcy means test, all hope is not necessarily lost. You may opt to file for Chapter 7 anyway. Just be prepared for the trustee to file a motion to dismiss the case or convert it to a Chapter 13 bankruptcy.

You can attempt to show “special circumstances,” such as recent unemployment, unusually high rent, or a serious medical condition.

If the average monthly income was factored in because of a recently lost job, you might still be able to file for Chapter 7 bankruptcy. A serious medical condition or unusually high rent might also result in being granted a Chapter 7 bankruptcy despite failing the means test.

To demonstrate the special circumstance, you must provide documentation for the requested actual expense or adjustment to your income. If the bankruptcy court allows the adjustment and you pass the means test, your Chapter 7 filing can proceed.

Can I Skip the Means Test?

People who are in debt because of operating a business might be eligible for Chapter 7 bankruptcy without having to complete a means test. Certain veterans might not have to take the means test to qualify for Chapter 7 bankruptcy. Veterans must be considered at least 30% disabled, and more than half of their debt must have been incurred while on active duty or serving in homeland defense activities.

Discussing Your Bankruptcy Options

Determining if you meet the requirements for a Chapter 7 bankruptcy can be complicated, especially if you have an income that is more than the state’s median. Qualifying under the means test does not necessarily mean you should file for Chapter 7 bankruptcy. It just means you can.

This is a big decision with many legal and financial consequences. Any decision to file for Chapter 7 bankruptcy should be made after considering alternatives and other factors. Get the answers to your bankruptcy questions from a local bankruptcy lawyer.