The Chapter 7 Bankruptcy Means Test

Not everyone can eliminate qualifying debt in Chapter 7 bankruptcy. Unless you're exempt, you must first pass the Chapter 7 means test—and most people who file for Chapter 7 bankruptcy must take it. You'll pass the means test if you don't have enough disposable income to repay a reasonable amount to creditors.

You can maximize your chance of passing the means test by knowing how the Chapter 7 means test works, such as the following:

• whether you're exempt from the bankruptcy means test
• how to calculate whether you'll pass the means test, and
• how to avoid Chapter 7 means test mistakes.

If you fail the means test, you won't qualify for a Chapter 7 discharge—the order that wipes out dischargeable debt. However, many people who don't qualify for Chapter 7 can use Chapter 13 for bankruptcy relief.

How Does The Chapter 7 Means Test Work in Bankruptcy?

The Chapter 7 means test is a two-step process determining whether you have any extra income the bankruptcy trustee can use to pay creditors. It calculates whether you have the "means" or ability to pay creditors some of what you owe.

If you can afford to pay a reasonable amount to creditors, you won't pass the Chapter 7 means test. Instead, you'll pay creditors your "disposable income," or the amount remaining after paying monthly expenses, through a Chapter 13 plan.

The Chapter 13 repayment plan lasts three or five years, or some amount between, if the filer repays 100% of all debts owed. By disqualifying high-income people, the means test prevents those who can afford to repay creditors from wiping out debt by filing for Chapter 7 bankruptcy.

Can I Pass The Bankruptcy Means Test?

Whether you can pass the Chapter 7 means test depends on several factors. You'll want to start by determining whether you're exempt from taking the test. If you aren't exempt—and most people aren't—you'll go through the following analysis:

• Is your income above or below your state's median income level? If it's below, you'll pass.
• If your income exceeds your state's median income level, could you pay 25% of your general unsecured debt over 60 months? If you could, you wouldn't pass the Chapter 7 means test.

The first step is simple—if your gross income is low enough, the court presumes you have nothing to pay creditors, and you'll pass. If your income is high and you don't pass the first step, you won't fail automatically.

Instead, you proceed to the second step and deduct allowed monthly expenses from your gross income. You'll pass if the calculations show you don't have enough income to pay creditors. Below is a detailed explanation of the three Chapter 7 means test steps.

Am I Exempt From the Chapter 7 Means Test?

You'll be exempt if you fall into one of the following exempt filer categories:

• Most businesses. Businesses other than sole proprietors don't take the means test because the business's income isn't relevant. Filing for Chapter 7 bankruptcy closes most companies. Also, most businesses aren't entitled to a Chapter 7 debt discharge.
• Some individuals. Suppose you currently have or previously had an ownership interest in a company. You might be responsible for some company business debt because you're a sole proprietor or signed a personal guarantee agreeing to pay company debt. When filing for Chapter 7 bankruptcy, you won't need to take the means test if you owe more business debt than consumer debt, which is all debt other than business debt.
• Some military personnel. You can check whether you qualify for an exemption based on your military status by reviewing the criteria on the exemption form (see the link below).

The form you'll use to declare you're exempt from the Chapter 7 means test is the Statement of Exemption from Presumption of Abuse Under §707(b)(2) form.

How Do I Compare My Income to My State's Median Income?

The means test compares your income against your state's median income. If your income is low, you'll pass the means test within a few simple steps.

You'll start by calculating your gross average monthly income. To do this, add all monthly income earned during the last six full months. For instance, if it's July 15, include income earned from January through June. Do not subtract tax or other deductions before dividing the total by six to get your average monthly income.

Next, you'll need to multiply the average monthly income amount by 12 to get a yearly amount you'll compare to your state's median income. You'll find the median income figures on the U.S. Trustee Program website by selecting the following:

• "Means Testing Information" on the left navbar
• the most recent date in the "Data Required for Completing the 122A Forms and the 122C Forms" box, and
• "Median Family Income Based on State/Territory and Family Size" under "Section I. Census Bureau Data"

You'll use the figures for a household the same size as yours. For example, if you are a family of three, use the median income for a family of three in your state.

You'll use the Chapter 7 Statement of Your Current Monthly Income form to calculate your gross monthly income.

What Happens If My Income Is Below the State Median?

You pass the means test. If your gross income doesn't exceed your state's median income, you qualify for a Chapter 7 bankruptcy debt discharge. You won't need to complete additional means test forms.

What Happens If My Income Is Above the State Median?

You don't fail automatically. You might still pass if your gross income exceeds your state's median. You'll find out after completing the remaining portion of the form. You'll do this by deducting allowed expenses from your income. The amount remaining determines whether you'll pass or fail the Chapter 7 means test.

How Do I Complete the Second Portion of the Chapter 7 Means Test?

You'll want your financial documents nearby, including bills and receipts, and have the appropriate form available, the Chapter 7 Means Test Calculation form. You'll also need the most recent expense figures posted on the U.S. Trustee Program website.

The following tips will help you complete the form and determine your disposable income.

When you use IRS standard expense figures. You must use the national and local standards for living expenses like rent, utilities, food, gas, and clothing, even if your actual costs are higher. These figures prevent people with an excessively luxurious lifestyle from benefiting from Chapter 7 bankruptcy.

When you use actual expense figures. You'll deduct the actual monthly cost of some expenses, like your mortgage, car payment, taxes, health insurance, and child care. High-income debtors with significant mortgage and car payments can sometimes pass the means test using these expenses. Substantial past-due income tax debts and support obligations also help you pass the means test. These debts must be paid in full in Chapter 13, reducing the amount available to pay general unsecured creditors.

Completing the second portion of the means test can be tricky. A bankruptcy lawyer can explain how your expenses can help you pass the means test.

How Can I Avoid Making Mistakes on the Chapter 7 Means Test?

Below we provide tips to help you avoid mistakes on the bankruptcy means test. Some tips will help you pass the means test, while others will help you prevent problems before they occur.

Learn what to do if you find a mistake on your bankruptcy paperwork.

Miscalculating Means Test Household Size

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 can 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 learn about other approaches in How to Determine Household Size for the Bankruptcy Means Test.

Because 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 before filing your case. You can find your bankruptcy court using the Federal Court Finder tool.

Reporting Means Test Income Incorrectly

The income figure on your means test can differ significantly from your year-to-date and current income, depending on your employment over the past year. Follow the form instructions when calculating your six-month average for each source of reportable income.

You'll use your average income during the entire 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.

Improperly Including Social Security Income on the Means Test

When taking the means test, you won't include Social Security benefits received for yourself or on behalf of others, such as a dependent child, as income. You'll have a better chance of passing the means test. However, you must list your Social Security benefits on Schedule I: Your Income. Schedule I shows the court how much income you expect going forward.

Failing to Claim Means Test Deductions

You'll want to deduct all expenses possible on the means test form. However, you can't deduct all your expenses, and you'll want to avoid a challenge from the Chapter 7 bankruptcy trustee.

For instance, voluntary retirement plan contributions and loan payments aren't deductible. Also, although you can deduct some school expenses for your children, the amounts are capped at a particular amount.

Not Using the Marital Adjustment Deduction in Chapter 7

If you're married but filing for bankruptcy without your spouse, you must still include your nonfiling spouse's income on the means test. A spouse with significant earnings can make it harder for you to pass the means test.

However, the means test lets you exclude the portion of your nonfiling spouse's income not used for household expenses in the marital adjustment deduction section. If your spouse must pay expenses that don't benefit your household—such as child support for a prior spouse—you can use the marital adjustment section to deduct the amount paid, which will help lower your income.

Learn more about how bankruptcy can affect a nonfiling spouse.

Reporting Taxes in Chapter 7

When calculating income tax expenses on the means test, many debtors use the monthly amounts withheld from their paychecks. But you can only deduct your actual tax liability on the means test. If you receive a large tax refund each year, you might overestimate your tax deduction by using your withholdings. Learn what happens to tax refunds in bankruptcy.

Final Step: Check Your Income and Expense Forms

Even if you pass the Chapter 7 means test, the Chapter 7 trustee will review the income and expenses disclosed in the bankruptcy forms. Unlike the means test that uses past earnings, the income and expense figures on bankruptcy Schedules I and J represent your current budget.

The trustee will check whether the figures show you have disposable income that could be used to pay creditors. In that case, the trustee might ask the court to convert the matter to Chapter 13 bankruptcy. The trustee's decision will likely depend on how much money is available to pay creditors.

What If I Don't Pass The Chapter 7 Means Test?

If you don't pass the means test, a Chapter 7 discharge won't be available. 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.

We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.