How The Bankruptcy Means Test Works

In bankruptcy, a means test determines if your income is low enough for you to file for Chapter 7 bankruptcy. It is a formula that is designed to prevent people with high incomes from filing for Chapter 7 bankruptcy. If a person with a high income fails the means test, the only option they would have is to file for Chapter 13. Chapter 13 is a type of bankruptcy, which gives people with a high-income extra time to repay their debt. Chapter 7 is for lower-income individuals who need to have their debt wiped out altogether.

When a person takes the means test for Chapter 7, they don’t need to be completely broke. You can earn a significant monthly income, and still qualify if your monthly expenses such as your mortgage, car payment, taxes and other monthly bills are high.

How Does the Chapter 7 Means Test Work?

The test was designed to make sure that only those who truly can’t pay their debts file for Chapter 7. The test is done by subtracting your monthly expenses from your current monthly income. Your total monthly income is your average income over 6 months before you file for bankruptcy. The amount that you come up with is your disposable income. The higher your disposable income is, the less likely it is that you will be able to use Chapter 7 bankruptcy. The only people who can file for bankruptcy are those with consumer debts and not business debts. Before you take the means test, you should figure out if your income is greater than or lower than the average median income in your particular state. If you earn more than the median, you need to figure out if you will have enough money left over after paying your monthly expenses to repay some of your debt.

Is Your Income More than the Median?

The first step to figuring this out is simple. If your current monthly income is less than the median income for your household’s size, you pass the test. You would not go any further with the means test, and you can file for Chapter 7.

Do You Have Enough Disposal Income to Repay Some of Your Debt?

If your household exceeds the state median, the test computations become much more complex. Your disposable income is the amount of money that you have left overpaying your allowed monthly expenses. You would need to figure out what that amount is. Next, you would need to figure out if this is enough money to pay off a portion of your unsecured debt, such as credit card bills. If your disposable income is more than a set amount, you fail the test and cannot file for Chapter 7.
It is important to understand that the median income levels vary by state and the number of people in the household. Each metropolitan region and county have different allowed amounts for housing, transportation, and basic necessities. For more information, you can use a Chapter 7 means test online calculator.

If Your Pass the Means Test

Just because you passed the means test, it does not necessarily mean that Chapter 7 is the best option.

If You Don’t Pass the Means Test

If you fail the means test, your only option would be to file for Chapter 13. This type requires that you make regular monthly payments over a 3 to 5 year period while on a strict budget which is monitored by the court. Most people who file for bankruptcy would rather file for Chapter 7 because there is no need to repay the debt. However, Chapter 13 is the best way to handle issues such as settling a default on a mortgage. Before you settle on filing for Chapter 13, it is important to talk to a bankruptcy lawyer. After speaking to a legal professional, you may realize that you can pass the means test after all.