What is the Means Test?

Before you can decide to file a Chapter 7 bankruptcy petition, you will have to complete the means test in order to make sure that you are truly in need of your debts to be discharged, and are not just “abusing” the system. Don’t be intimidated by the sound of that—it’s a straightforward test, and most debtors fully qualify for Chapter 7 bankruptcy.

The Chapter 7 means test is divided into two parts, both focusing on your income and expenses.

Step One: Assess Monthly Income

The first part of the test compares your monthly income (which is determined by a worksheet that the court will provide) to the median income for your area and household size. If your monthly income is at or below the median, the means test is over—there is no presumption of abuse and you can file for Chapter 7 bankruptcy.

The median will vary fairly significantly according to your geographic location and the size of your family. Depending on the state you live in, the 2006 median income for a family of four ranged from $52,217 to $92,205. The U.S. Trustee’s Office has a page on their web site with the most up-to-date median incomes.

Step Two: Deduct Allowable Expenses

If you find that your income exceeds the state median, it doesn’t necessarily mean that you won’t be able to file under Chapter 7. This just means you must move on to the second part of the test. During the second step, you will deduct certain allowable expenses from your monthly income based on IRS standards. The remaining amount over after these allowable expenses is your disposable income. Then you will multiply that number by 60 to determine how much disposable monthly income you’ll have over the next five years.

If the total turns out to be less than $6000, then you have passed the means test, and you may file bankruptcy under Chapter 7, since there is no presumption of abuse. On the other hand, if the total is over $10,000, then there is a presumption of abuse, 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 $6000 and $10,000, then you must make one more calculation. For this step, you will take your expected disposable income over the next five years—that number you calculated falling between $6000 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.

Means Test Summary

In short, the means test works like this:

  1. 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.
  2. 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.
  3. 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 Bankruptcy Lawyer For More Answers to Questions about Chapter 7 Bankruptcy!

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 our free bankruptcy case evaluation form, or call us toll-free at 1 (877) 226-6844, and we’ll help you get in contact with an experienced bankruptcy attorney in your area.