Bankruptcy Law

Chapter 7 Means Test

The means test essentially helps determine a filer’s amount of disposable income. The test deducts certain monthly expenses from your "current monthly income" – your average income in the six months before you file for bankruptcy. This determines your monthly "disposable income." If your disposable income is too high, you likely won’t qualify to use Chapter 7 bankruptcy.

It is an objective standard passed into law in 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 bankruptcy.

Completing the Bankruptcy Means Test

The means test is an objective calculation which is laid out by the U.S. federal government. The official Chapter 7 Bankruptcy means test form and calculation instruction is available on the U.S. 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

The income calculation generally includes income from 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 a farm
  • regular child support 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: Comparing your income to your state’s median household income

The test then seeks to determine if your current monthly income is less than the median income for a household of your size in your state. If so, you typically pass and can file for Chapter 7. The U.S. Census Bureau can provide information on the average household income in your state. If you pass the means test at this stage, you are technically eligible to file for Chapter 7 Bankruptcy. If you do not pass at the stage you will have to complete the second portion of the means test to determine exemptions which might apply to your situation.

Step 3: Do means test exemptions or special considerations apply?

If a bankruptcy filer makes more than the state's median income, they may still be able to qualify for Chapter 7 bankruptcy under certain circumstances.

In this portion of the means test, certain expenses are subtracted from the income to determine if the person meets 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 the debtor does not qualify for Chapter 7.

What if I Failed 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 that 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 Still File for Chapter 7 if I Failed the Bankruptcy Means Test?

If a debtor does 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.

The debtor 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 because of a job that was recently lost, that person 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, the debtor must provide documentation for the requested expense or adjustment to their income and must explain the necessity of the adjustment or expense. If the bankruptcy court allows the expense or adjustment and the debtor passes the means test, then the debtor will win the motion.

Can I Bypass 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. The veteran must be considered at least 30 percent disabled. And more than half of the veteran’s debt had to be incurred while on active duty or while serving in homeland defense activities.

If a filer's debts came mostly from operating a business, the bankruptcy means test is inapplicable and the debtor may file for bankruptcy under Chapter 7.

Discussing Your Bankruptcy Options

Determining if someone meets the requirements for a Chapter 7 bankruptcy can be complicated, especially if the person has 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 merely means you have the right to do so.

This is a big decision with many legal and financial ramifications. Any decision to file for Chapter 7 bankruptcy should be made after considering alternatives and other factors specific your circumstances.

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