If you want to file Chapter 7 bankruptcy, you must pass the Chapter 7 bankruptcy means test. Congress designed the Chapter 7 bankruptcy means test to prevent higher income-earners from discharging debts they have income sufficient to pay. The means test affects the chapter of bankruptcy under which you are eligible to file. Discuss your income and expenses in full with a qualified bankruptcy lawyer to understand how this may affect your case.
Understanding the Bankruptcy Means Test
The bankruptcy means test applies to individuals and couples wishing to file a Chapter 7 bankruptcy. Even if only one spouse files bankruptcy, you must include all sources of household income in the bankruptcy means test calculation.
To qualify for Chapter 7 and have your eligible debts discharged, your income must usually be below certain levels. The means test was designed to prevent Chapter 7 filings for those who can afford to repay their creditors. In other words, you must show that you have limited means and thus it is fair to forgive the debt without expecting you to pay.
The Chapter 7 means test is actually a two-part test. The first section of the means test compares your gross household income to the median income in your state. If your income is below the median, then you qualify to file Chapter 7 bankruptcy.
If your income is above the median, however, then the second part of the test applies. To determine if you are eligible to file for a Chapter 7 bankruptcy, you must calculate your monthly income then subtract certain allowable expenses. These expenses are based on IRS and Census standards and often do not reflect reality.
If you do not have sufficient extra money – or “disposable income” – left on a monthly basis to pay your creditors, then you pass the second part of the means test and can file for Chapter 7. But not all expenses that you actually incur can be deducted from your income when determining your disposable income.
Passing the Chapter 7 Bankruptcy Means Test
The means test is not easy to complete, and many terms are ambiguous. The IRS and Census standards used in the bankruptcy means test are available at the DOJ website.
For some people, the ability to pass the means test changes from month to month, dependent on income. For other people, the means test may represent an absolute bar to filing Chapter 7. Still others need not take the means test at all and are exempt from the requirement.
For those who do not qualify for Chapter 7, there are usually other options, including Chapter 13 and Chapter 11, both of which typically involve extended repayment plans.
Only a qualified bankruptcy lawyer can advise you fully on your ability to pass the Chapter 7 bankruptcy means test.