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:
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.
The "means test" 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 through a Chapter 13 plan, you won't pass the Chapter 7 means test.
Chapter 13 filers pay creditors their "disposable income," or the amount remaining after paying monthly expenses. 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.
If you're required to take the Chapter 7 means test, a two-step process will determine whether you have any extra income the bankruptcy trustee can use to pay creditors. 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'll deduct allowed monthly expenses from your gross income. If the calculations show you don't have enough income to pay creditors, you'll pass.
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:
Below is a more detailed explanation of the three Chapter 7 means test steps.
You'll be exempt if you fall into one of the following exempt filer categories:
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.
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. If your gross income exceeds your state's median, you might still pass. You'll find out after completing the remaining portion of the form to determine whether you pass.
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:
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.
The Chapter 7 means test form you'll use to calculate your gross monthly income is the Chapter 7 Statement of Your Current Monthly Income form.
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.
You don't fail automatically. Instead, you must complete the remaining portions of the means test. 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.
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'll 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.
You can use actual expense figures for some things. 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.
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 avoid problems before they occur.
Learn what to do if you find a mistake on your bankruptcy paperwork.
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.
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 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.
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.
You'll want to deduct all expenses possible on the means test form. However, you can't deduct all expenses, and you'll want to avoid a challenge from the bankruptcy trustee.
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 monthly car loan or lease payments. The same problem can arise when the debtor intends to return the vehicle to the lender in bankruptcy.
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. Review the instructions for each expense deduction carefully to avoid claiming expenses you aren't entitled to on the means test.
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. 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 non-filing spouse's income not used for household expenses in the marital adjustment deduction section. If your spouse pays qualifying expenses—such as child support to a prior spouse—you can use the marital adjustment section to help lower 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 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.
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 your bankruptcy forms represent your current budget.
If the figures show you have disposable income you could pay creditors, 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.
Learn more about Chapter 7 trustee responsibilities.
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.