Summary: The Bankruptcy Code requires most debtors to take the ‘Means Test.’ While the details are complex, most people pass without issue. This article reviews how debtors get two chances to pass the Means Test.
The “Means Test”
One of the primary issues in a consumer bankruptcy case is whether the debtor passes the Means Test. The Means Test is a complicated formula applied to a person’s household income and expenses. The object is to determine whether they have the means to repay their debt.
Most people overcome the Means Test because they have two opportunities to pass. First, a debtor passes if their income is less than the median income for a similar household size. Second, even if their income is over median, a debtor still passes if they can show sufficient expenses.
#1: You Pass if Your Household Income Is Less Than Median Income
The Bankruptcy Code requires that you calculate your income for the six months before the proposed bankruptcy filing date. You then double that six-month total to get an “annualized” or yearly income. You then compare your yearly income to the median income for your household size.
To determine if you qualify as an under median debtor to file Chapter 7, find your household size. If your current annual income is less than the totals below, you are “under median” and pass.
See our page on Qualifying for Chapter 7 Bankruptcy to learn more about the current means test guidelines.
If you pass, you are eligible to file a Chapter 7 bankruptcy. Chapter 7 is generally a straight discharge of unsecured debts. If you don’t pass, your only good option may be a Chapter 13, which is a debt reorganization.
For more information on means-testing, go to the Means Testing Section of the US Department of Justice web page.
If Your Income Is Over Median
If your annualized household income is under median, then you pass the Means Test. You are eligible to file a Chapter 7 bankruptcy, assuming all other requirements have been met.
#2: You Pass if No Monthly Disposable Income Exists
If your household income is over median, you must continue on to see if you still qualify for Chapter 7 bankruptcy. In other words, you have one more chance.
For this second part, we use your expense information to determine a monthly average. Some categories considered include mortgage payments, car payments, child care, household expenses, medical costs, and many others.
After subtracting expenses from income, what’s left, if any, is called “disposable income.” Theoretically, this is the amount you have available to repay creditors each month.
Usually, only those who earn relatively high incomes and incur relatively low expenses have issues with Failing the means test. In those cases, your only options may be Chapter 13 or Chapter 11 bankruptcy.
If you have no “disposable income,” you pass the Means Test.
The Means Test is one hill that must be climbed in most cases. Some people pass initially because their income is under median. However, even if your income is over median, you may pass by showing high expenses. No matter the circumstances, you should always consult with a knowledgeable bankruptcy attorney. Then, you can discuss the qualifications of bankruptcy and what options might be best for your situation.