Chapter 7 Bankruptcy Means Test

The bankruptcy “means test” determines whether your income level meets the threshold to file a Chapter 7 bankruptcy. Chapter 7 bankruptcy is designed for low income earners. As such, the bankruptcy means test designed to keep filers with higher incomes from filing for Chapter 7 bankruptcy. Debtors whose income is too high to file a Chapter 7 may pay back a portion of their debt by filing a Chapter 13 bankruptcy, but may not use Chapter 7 bankruptcy to wipe out their debts altogether.

However, having to take the Chapter 7 means test doesn’t mean that you must be flat broke in order to file a Chapter 7 bankruptcy. You can earn a substantial monthly income and still be eligible to file a Chapter 7 bankruptcy  if you have a lot of expenses, such as high car and mortgage  loan payments, certain taxes as well as other consumer debt.

How Does the Chapter 7 Bankruptcy Means Test Work?

The Chapter 7 bankruptcy means test was designed to limit the use of Chapter 7 bankruptcy to those who are truly in dire financial stress. It does this by calculating your average monthly disposable income. The higher your disposable income, the less likely you will be eligible allowed to use Chapter 7 bankruptcy.

Debtors that wish to file a Chapter 7 may only eliminate personal debt and not business debt. In order to take the means test, you must  determine whether your income is more or less than the median income in your state. If you earn more than the median income, you must figure out whether you would have enough left over, after subtracting basic expenses, to repay a portion of your debt.

Is Your Average Income More Than the Median?

If your current median income is less than the median income for your household, you have passed the Chapter 7 bankruptcy means test and may file for a Chapter 7 bankruptcy.

Do You Have Sufficient Disposable Income to Repay Some Debts?

For those whose household income is more the state median, the means test calculations get significantly more complicated. You are required to determine if you will have enough of income left over after paying basic monthly expenses. This is referred to as disposable income. If your disposable income exceeds a certain amount, you fail the means test and you will not be eligible to file a Chapter 7 bankruptcy. Median income levels vary according to household size and also depends on which state you reside in. Furthermore, each county and metropolitan region has different allowed amounts for categories of expenses: housing basic, necessities and transportation.

If You Pass the Chapter 7 Bankruptcy Means Test

Just because you qualify under the means test does not necessarily mean that filing a Chapter 7 bankruptcy is the best option for you.

If you don’t pass the means test, you will be required to file Chapter 13 bankruptcy. When you file a Chapter 13, you will be required to make monthly payments over a three- to five-year period as per a strict budget monitored by the court. Most people who file for bankruptcy prefer Chapter 7, which requires no repayment. However, Chapter 13 bankruptcy is still the best way to handle specific types of problems, like foreclosure, mortgage delinquencies and certain taxes.  

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