To be eligible to file a Chapter 7 bankruptcy, you must first qualify. The “means test” calculates whether you have the “means” to pay back a portion of what you owe to your creditors. The purpose of the means test is to disqualify people with high incomes from wiping out debt by filing for Chapter 7 bankruptcy. If you fail the means test, you won’t qualify for a Chapter 7 discharge—the order that wipes out dischargeable debt. Instead, you’ll file Chapter 13 for bankruptcy relief.
Read on to find out more about what the Chapter 7 means test is, how it works, and whether you qualify to file a Chapter 7 bankruptcy, or start by learning more about Chapter 7 bankruptcy.
The means test compares your average monthly income for the six months before filing bankruptcy against the median income of your state while taking into account your expenses and the national and local standards for some living expenses. The test determines whether you have disposable income leftover (after living costs) that you should use to pay your creditors.
If your income is low, you’ll pass the means test within a few simple steps. If your gross income is higher than the median of your state, you’ll complete the remaining portion of the form—the part that takes into account your living expenses—to determine whether you pass.
The answer depends on whether your income is above or below your state’s median income level. Keep in mind that you must use the state median income for a household of the same size as yours. For example, if you are a family of three, then you look at the median income for a family of three in your state. You’ll find the median income figures and all other needed means test multiples on the U.S. Trustee Program website.
If your average income for the six months before filing bankruptcy is below the median income of your state, then you will pass the means test and qualify to file a Chapter 7 bankruptcy. You won’t need to fill out the rest of the means test form.
If your average income is above your state’s median income, you don’t fail automatically. Instead, you must complete the entire means test form, which requires you to fill in figures for your expenses.
You must use IRS standard expense figures. Depending on where you live, the means test uses the national and local standards in your area for certain living expenses such as rent, utilities, food, gas, and clothing when determining your disposable income. Even if your actual expenses for these items are higher than the allowed standards, you can’t take advantage of them to minimize your disposable income.
You can use actual expense figures for some things. For some expenses, such as your mortgage, car payment, taxes, health insurance, child care, and certain other items, you can deduct your actual costs on the means test. For example, high-income debtors with a significant mortgage expense can sometimes pass the means test because of the ability to deduct this amount on the means test.
Not everyone is entitled to wipe out debt in Chapter 7 bankruptcy. You must show that you can’t repay creditors by taking and passing the means test. The means test has instructions for each item, but even so, it’s a lengthy and complicated form, and you’ll likely want to read it through.
You’ll find the three means test forms—Chapter 7 Statement of Your Current Monthly Income (Form 122A-1), Statement of Exemption from Presumption of Abuse Under §707(b)(2) (Form 122A-1Supp), and Chapter 7 Means Test Calculation (Form 122A-2)—on the U.S. Courts Bankruptcy Forms website. Read on for tips to help you avoid mistakes on the bankruptcy means test.
Using the correct household size on the means test can impact whether you qualify for Chapter 7 bankruptcy. On the means test, the larger your household size, the more money you’ll be able to make.
While calculating your household size might sound easy, bankruptcy courts use different approaches for determining who counts as a household member. Many courts allow you to count all dependant members living in your household under the “heads on beds” rule. But not all courts. You can find out about other approaches used by reading How to Determine Household Size for the Bankruptcy Means Test.
Of course, you’ll need to know which to use. Since the approaches vary depending on where you live, try calling the U.S. Trustee office responsible for your court, or contact a knowledgeable bankruptcy attorney in your area before filing your case. You can find your bankruptcy court using the Federal Court Finder tool.
You’ll use your average income during the six months before you file your bankruptcy to determine whether you qualify for Chapter 7 bankruptcy. You’ll use the full six months ending on the last day of the calendar month before your filing date. This figure is doubled and compared against the median income in your state for a same-size household. You’ll find the current figures on the U.S. Trustee Program website (link above).
Because you’ll use the six months for calculations, the income figure on your means test can differ significantly from your true year-to-date-income and your current income. You’ll want to be sure to follow the instructions on the form and calculate your six-month average for each source of reportable income.
When taking the means test, you do not include any Social Security benefits that you receive for yourself or on behalf of others, such as a dependent child, as income. This has a distinct advantage of lowering your income, and you'll have a better chance of passing the means test.
However, regardless of the outcome of your means test, you will also be required to complete Schedule I: Your Income. Schedule I shows the court how much income you expect going forward—and you must list your Social Security benefits on that form.
Taking the means test can be a multi-step process. If your income surpasses the median for your state, you’ll have a second chance to pass. You’ll subtract allowed deductions from your income to determine whether you have sufficient remaining income to repay creditors. Some will be actual expense amounts, and others will be predetermined. You’ll want to take advantage of all the deductions available.
You can’t deduct all expenses, however. For instance, voluntary retirement plan contributions and loan payments aren’t deductible. Also, many debtors erroneously claim the standard car ownership deduction even though they don’t make a monthly car loan or lease payments. In general, if you own your car free and clear, you can claim the vehicle operation expense on the means test but not the car-ownership deduction.
To avoid a challenge from the bankruptcy trustee, review the instructions for each expense deduction carefully to make sure you don’t claim any expenses you are not entitled to on the means test. Learn more about Chapter 7 trustee responsibilities.
If you are married but filing for bankruptcy without your spouse, you must still include your non-filing spouse’s income on the means test if you share a household. If your spouse has a significant amount of income, this can make it harder for you to pass the means test.
However, the means test allows you to exclude the portion of your non-filing spouse’s income that isn’t used towards your household expenses in the marital adjustment deduction section. So the marital adjustment section can help you pass the means test by lowering your income. Learn more about how bankruptcy can affect a non-filing spouse.
When calculating income tax expenses on the means test, many debtors use the amounts withheld from their paychecks each month. But you can only deduct your actual tax liability on the means test. So if you receive a large tax refund each year, you might be overestimating your tax deduction by using your withholdings. Learn what happens to tax refunds in bankruptcy.
If you don’t pass the means test, a Chapter 7 discharge won’t be available to you. However, you might still be able to take advantage of a Chapter 13 bankruptcy, although it requires you to repay a portion of your debts through a Chapter 13 repayment plan. Learn more about Chapter 13 Bankruptcy.