Since the 2005 bankruptcy law was passed, debtors must pass a means test before they will be permitted to file a Chapter 7 bankruptcy.
This test is used to determine if you can qualify to file a Chapter 7 bankruptcy. The test was added to force some debtors who are in a financial position to pay off some of their debts to file a Chapter 13 plan instead of Chapter 7. In Chapter 13, debtors pay off a percentage of what they owe over a three to five-year period.
Many debtors who earn too much money often can pay their bills without the need to file bankruptcy.
For others, medical bills, divorce, and other events can force a person to need to file for bankruptcy protection even though they make too much money.
With the help of a Chapter 7 lawyer, you will get the help that enables you to discharge all of his or her debts without paying a percentage on the dollar. The means test generally does not mean that you can’t file a Chapter 7 if you make any more.
The means generally only applies if your income is above the halfway point of what other people in your geographical location earn for their family size.
The median is somewhat different than the average because a few very billionaires can skew the results.
The basics of the Chapter 7 means test
The means test applies to debtors who primarily have consumer debts and not business debts.
The first part of the test is to determine whether your income is above or below the median income for the state in which you live.
If your income is above the median for your state and for the size of your family, then you can begin to review your disposable income – the amount you have left over after you pay your core expenses. Core expenses include things like your mortgage, utility bills, food, and other essential expenses.
So, this means there are two tests. The first means test just looks at your income. The second test looks at your income and your expenses.
The aim of the second test, as mentioned earlier, is to see if you have enough funds to pay something to your creditors.
If you make too much money or you have too much disposable income, then you cannot file a Chapter 7. You must file a Chapter 13. The bankruptcy court looks at your income and expenses for the six months prior to the filing of your bankruptcy petition.
The median standards do vary by state. Some states have higher median incomes than others. You can find more on means testing at the Department of Justice website – https://www.justice.gov/ust/means-testing/20191101 For example, the median income levels based on family size for the following states, according to recent government data, are:
State 1 Person 2 People 3 People 4 People *
Alabama $47,680 $55,905 $67,334 $81,514
Alaska $62,858 $76,208 $100,494 $101,221
Arizona $51,388 $64,543 $70,428 $85,403
Arkansas $42,461 $52,986 $57,221 $72,767
California $59,286 $77,860 $86,665 $99,512
Colorado $60,819 $79,711 $92,517 $105,947
Connecticut $65,502 $87,017 $99,857 $123,477
Adjustments to the means test calculation are also made for different counties and cities within each state because the costs for housing, transportation, and essentials vary within the state.
There are also national standards that may work to your benefit.
Adjustments and complications
Sometimes, the determination of whether you pass the means test (your income is below the median) can depend on whether your debt is a mix of consumer debt and business debt.
An experienced bankruptcy lawyer will explain whether you qualify to file a Chapter 7 in this scenario.
Some types of income are not included in the means test income calculation. For example, Social Security retirement income is generally not included which helps senior citizens qualify for a Chapter 7.
Debtors must fill out various means test forms when they file their Chapter 7 petition. Again, your bankruptcy lawyer will help you fill out the forms and explain whether you qualify.
Generally, if you pass the first test, the one that just looks at your income, you don’t need to fill out the forms for the second test, the one that examines your income and your core expenses.
Some people, such as those who serve in the US military are not required to take the means test.
Even if you pass the means test, that doesn’t mean that you should automatically file for a Chapter 7. Chapter 7 is primarily used for debtors who don’t have secured debts.
If you own a home which is secured by a mortgage, then you will likely lose your home (it will be sold to pay creditors) unless you have large exemptions or if you file a Chapter 13 bankruptcy.
In a Chapter 13, you basically get three to five years to pay off any arrearages provided you make the monthly payments for all future bills.
If you fail the means test, then you must file the Chapter 13 bankruptcy petition.