by: Baran Bulkat, Attorney
To be eligible to file a Chapter 7 bankruptcy you must first pass something called the “means test.” If you make too much money, you may not be able to pass the means test and file a Chapter 7 bankruptcy. 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.
(To learn more about Chapter 7 bankruptcy, see the articles in our Chapter 7 Bankruptcy topic area.)
The means test is designed to disqualify people with high incomes from being able to file a Chapter 7 bankruptcy and wiping out all of their debt. It calculates whether you have the “means” to pay back a portion of what you owe to your creditors. If you fail the means test, you cannot file a Chapter 7 bankruptcy but may file a Chapter 13 to repay some of your debts.
The means test compares your average monthly income for the six-month period prior to filing bankruptcy against the median income of your state while taking into account your expenses and the national and local standards for certain living expenses. It uses this information to determine if you have any disposable income left over (after living expenses) that should be paid to your creditors. Depending on your income, you may automatically pass the means test within a few simple steps or be forced to complete the entire form 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.
If your average income for the six months prior to filing bankruptcy was below the median income of your state, then you automatically pass the means test and qualify to file a Chapter 7 bankruptcy. You do not need to fill out the rest of the means test form.
If your average income is above your state’s median income, then you do not automatically pass the means test. However, this does not mean that you automatically fail the test either. 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. This means that even if your actual expenses for these items are higher than the allowed standards, you cannot take advantage of them to minimize your disposable income.
You may use actual expense figures for some things. However, for some expenses such as your mortgage, car payment, taxes, health insurance, child care, and certain other items, you can deduct your actual expenses to pass the means test. For example, even if you are a high income debtor you may still pass the means test if you also have a big mortgage expense because you can deduct this amount in full from your income on the means test.
If you do not pass the means test, you cannot file a Chapter 7 bankruptcy. However, you may still be able to take advantage of a Chapter 13 bankruptcy but you will likely have to pay a portion of your debts back. (To learn more about Chapter 13 bankruptcy, see the articles in our Chapter 13 Bankruptcy topic area.)