All About the Chapter 7 Bankruptcy Means Test
It used to be the case that almost anyone could file for Chapter 7 bankruptcy. However, that changed about 10-15 years ago, with the institution of what is known as the Means Test. The means test is a test of a debtor’s income to make sure that the debtor does not make too much money.
If you cannot pass the means test—that is, you make too much money—you cannot file for Chapter 7 bankruptcy, regardless of what property, money or assets you own. In other words, you could theoretically own no property or assets, but still not be able to file for bankruptcy, if you make too much money.
The means test is concerned with your disposable income—money you have left over after paying your bills and expenses. The bankruptcy code specifies what expenses you can deduct from your total income to determine what your disposable income is.
The initial step of the means test is to see if your income is more or less than the median income for a household in your state. There are charts online showing what that median income is, and the numbers change routinely. If you make less than the median, you pass the means test and can file for Chapter 7, regardless of whether you have disposable income or how much disposable income you may make.
If you make more than the median income, you will begin calculating your deductions on a bankruptcy form to see if what money you have left over after deduction of those expenses is too much to qualify for Chapter 7.
Consumer or Business Debt?
The means test only applies where most of the debt you are trying to discharge is consumer in nature, and not business related.
So, for example, if your bankruptcy debt contained $30,000 in consumer credit card debts, and $50,000 in debts incurred as a result of a failed small business you owned, or because of debt on an investment property, the majority of your debts may be considered business or commercial related, thus excusing you from taking the means test at all.
The Means Test and Timing
As you can see, for the purpose of the means test, it is better to make less money than more. The Bankruptcy Code generally looks at your average income for the 6 months prior to filing for bankruptcy. That means that you may have to time your bankruptcy the right way.
For example, filing for bankruptcy immediately after getting a bonus at work, would likely make your average income seem higher than it is. If you were just released from your job, you may want to wait to file, so your 6 month average reflects the loss of income.
If you cannot qualify for a Chapter 7 because of the means test, you have the option of waiting to file for Bankruptcy until you can pass the means test, or you can opt to file a Chapter 13, where your income level can be higher than with a Chapter 7.