Filing for bankruptcy can be a complicated process, and one of the first steps for individuals considering Chapter 7 bankruptcy is completing the means test. This financial evaluation helps determine whether someone qualifies for Chapter 7, which can discharge certain debts. If you are thinking about bankruptcy, understanding the means test is essential to know what to expect and how it may impact your case.
What Is the Bankruptcy Means Test?
The means test is a formula used to evaluate your income, expenses, and household size to assess whether you have enough disposable income to repay some of your debts. This test was introduced to prevent individuals who have the ability to repay creditors from discharging their debts through Chapter 7 bankruptcy.
The means test applies specifically to those who are filing for Chapter 7 bankruptcy. If you are filing for Chapter 13 bankruptcy, the test does not determine whether you qualify — but it does play a role in deciding how much you will have to pay through your repayment plan.
Who Needs to Take the Means Test?
Not everyone filing for bankruptcy needs to complete the means test. Whether you are required to take it depends on your income level and the type of bankruptcy you plan to file.
You must take the means test if:
- You are filing for Chapter 7 bankruptcy
- Your household income is above the state median for a household of your size
You may be exempt from the means test if:
- Your household income falls below the state median
- Your debts are primarily business debts rather than consumer debts
- You are a disabled veteran who incurred your debts primarily during active duty
How the Means Test Works
The means test evaluates your financial situation in two main steps.
Step 1: Comparing Your Income to the State Median
The first part of the means test compares your average household income over the past six months to the median income for households of the same size in your state. If your income is below the median, you automatically qualify for Chapter 7 bankruptcy and do not need to complete the rest of the means test.
Step 2: Calculating Disposable Income
If your income exceeds the median, you move on to the second part of the test. This step calculates your disposable income by subtracting allowable expenses from your monthly income. Allowable expenses may include:
- Housing costs
- Utilities
- Food and groceries
- Medical expenses
- Transportation costs
- Childcare expenses
The remaining amount, known as disposable income, determines whether you can reasonably afford to pay back some of your debts. If your disposable income is too high, you may not qualify for Chapter 7 and may need to consider filing for Chapter 13 instead.
Why the Means Test Matters
The results of the means test can significantly impact the type of bankruptcy you can file and how your debts are handled.
Qualifying for Chapter 7
If you pass the means test, you can pursue Chapter 7 bankruptcy, which typically allows for the discharge of unsecured debts like credit card balances and medical bills. This is often the fastest and most complete form of debt relief available to individuals.
Failing the Means Test
If you do not pass the means test, Chapter 7 may not be an option. Instead, you might need to file for Chapter 13 bankruptcy, which involves creating a court-approved repayment plan to pay back a portion of your debts over three to five years.
Common Questions About the Means Test
Many people feel anxious about the means test, especially if they are unsure how their income and expenses will be evaluated. Below are a few common concerns.
What if my income changes before filing?
The means test looks at your income from the past six months, so changes in income can directly affect your eligibility. If you recently lost a job or took a pay cut, it could improve your chances of qualifying for Chapter 7.
Can I deduct all my expenses?
Not all expenses are treated equally under the means test. The court uses standard expense guidelines for many categories, so you may not be able to deduct the full amount of your actual living expenses.
Is passing the means test a guarantee I can file for Chapter 7?
Passing the means test makes you eligible for Chapter 7, but other factors can still influence your case. Consulting with a bankruptcy attorney can help you understand the full picture.
Understanding Your Options After the Means Test
The bankruptcy means test can feel intimidating, but it is designed to ensure that those who truly need debt relief can access it. Whether you qualify for Chapter 7 or need to explore Chapter 13, understanding your options is the first step toward financial freedom.
If you are unsure about your eligibility or need help navigating the process, speaking with a bankruptcy professional can provide the guidance you need. Contact The Law Offices of Paul Y. Lee at 951-755-1000 for a free legal consultation.
