What is the Chapter 7 Means Test?
Before filing Chapter 7 bankruptcy, you must qualify under the Chapter 7 means test, which is used to determine if you are eligible for this form of bankruptcy.
The means test looks at your debts, income and assets. Because Chapter 7 bankruptcy is such a powerful tool for erasing debt, the courts want to ensure that it is only used by people truly in need.
Most People Considering Chapter 7 Are Allowed to File
The means test is a straightforward test and most people qualify to file Chapter 7 bankruptcy.
To learn more about Chapter 7, complete this form for a free, no-obligation consultation by a local attorney.
Chapter 7 Bankruptcy Means Test Steps
The Chapter 7 test is divided into two parts and both focus on your income and expenses.
Step 1: Your Monthly Income
The first part of the test compares your monthly income to the median income for your state and household size.
If your monthly income is at or below the median income level, the means test is over—there typically is no presumption of abuse and you can file your Chapter 7 bankruptcy petition.
How Does the Court Determine My Income?
To calculate your applicable annual income, the court looks at the previous six months and multiplies that amount by two.
Those who have recently seen a reduction of income or job loss may consider waiting a few months to file, as this could significantly lower their annual income under the means test.
The median will vary fairly significantly according to your geographic location and the size of your family.
The U.S. Trustee’s Office updates the median income levels typically twice a year based on the latest data.
Step 2: Deduct Allowable Expenses
Even if your income is greater than the state median, you may still be able to file under Chapter 7 if you qualify under the second part of the test, which calculates your disposable income.
This second step deducts certain allowable expenses, such as housing costs and utilities, from your monthly income based on IRS standards.
The remaining amount over after these allowable expenses is your disposable monthly income. This number is then multiplied by 60 to determine how much disposable monthly income you’ll have over the next five years.
Generally, if the five-year total is less than $6,000, then you have passed the means test, and you may file bankruptcy under Chapter 7, since there is no presumption of abuse.
If the total is over $10,000, then there is a presumption of abuse and will typically need to file a Chapter 13 repayment plan, though you will be given the chance to include additional necessary expenses to reduce your monthly income.
However, if your total disposable income for the five-year period falls between $6,000 and $10,000, then you must make one more calculation.
The Third Step to Qualifying
For this step, you will take your expected disposable income over the next five years—that number you calculated falling between $6,000 and $10,000—and compare it to the total amount of your non-priority unsecured debts.
If your disposable income is less than 25% of the total of those debts, there is no presumption of abuse, and you therefore qualify to file under Chapter 7.
Just as before, you will have the opportunity to show special circumstances that justify the inclusion of additional expenses.
Summary: The Bankruptcy Means Test
In short, the means test works like this:
Compare your monthly income to the state median:
- If your income is at or below the state median, the presumption does not arise and you “pass” the means test;
- If your income is above the state median, go on to calculate your disposable income for the upcoming five year period.
Calculate your disposable income over the upcoming five years:
- If that number is below $6000, the presumption does not arise and you “pass” the means test;
- If that number is above $10,000, the presumption does arise, and you can file under Chapter 7 only with a showing of special circumstances;
- If that number is between $6000 and $10,000, calculate 25% of your outstanding unsecured, non-priority debts.
Multiply your outstanding unsecured, non-priority debts by .25:
- If your disposable income over the next five years (as calculated in step 2) is greater than 25% of your unsecured, non-priority debts, the presumption arises and you can file under Chapter 7 only with a showing of special circumstances;
- If your disposable income over the next five years (as calculated in step 2) is less than 25% of your unsecured, non-priority debts, you “pass” the means test and can file under Chapter 7.
Even if you’ve passed the means test, you should know that your bankruptcy trustee can still throw your case out for abuse if he deems that your particular case warrants it.
In any case, your bankruptcy lawyer can give you more specific advice about what kinds of circumstances might cause a trustee to challenge or dispute your bankruptcy case.
Talk to a Chapter 7 Bankruptcy Lawyer Today
If you have any other questions about the Chapter 7 means test, speak to a local bankruptcy attorney as soon as possible.
Simply fill out free bankruptcy case evaluation form on this page or call us toll-free at 877-226-6844 and we’ll help you get in contact with a bankruptcy lawyer in your area.