A Guide for Debtors

Filing for bankruptcy can be a daunting process, often made more complex by the legal requirements and eligibility criteria that must be met. One of the most critical components of determining whether you can file for Chapter 7 bankruptcy is the means test. This test is designed to prevent abuse of the bankruptcy system by ensuring that only those who genuinely need debt relief can discharge their debts through Chapter 7 bankruptcy.

In this blog post, we’ll break down what the means test is, how it works, and what it means for your bankruptcy filing.

What is the Bankruptcy Means Test?

The means test was introduced as part of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005. Its primary purpose is to assess whether a debtor’s income is low enough to qualify for Chapter 7 bankruptcy, which involves liquidating assets to pay off creditors and discharging remaining eligible debts.

If your income is too high to pass the means test, you may be required to file for Chapter 13 bankruptcy instead. Chapter 13 involves creating a repayment plan to pay back a portion of your debts over a period of three to five years.

How Does the Means Test Work?

The means test involves two main steps:

1. Comparing Your Income to the Median Income:

• The first part of the means test compares your household income to the median income for a household of the same size in your state. Median income levels vary by state and are updated regularly, so it’s important to check the latest figures when considering bankruptcy.

• If your income is below the state median, you automatically pass the means test and can proceed with filing for Chapter 7 bankruptcy.

• If your income is above the median, you’ll need to move on to the second step of the test.

2. Calculating Disposable Income:

• In the second step, the means test examines your disposable income by deducting certain allowed expenses from your monthly income. These expenses include costs like housing, utilities, food, transportation, and other necessary living expenses.

• The test then determines how much disposable income you have left after these deductions. If your disposable income is below a certain threshold, you pass the means test and can file for Chapter 7.

• If your disposable income is above the threshold, you may not be eligible for Chapter 7 bankruptcy and might have to consider filing for Chapter 13 instead.

What Happens If You Fail the Means Test?

Failing the means test doesn’t mean you have no options. While it disqualifies you from filing for Chapter 7 bankruptcy, you may still be eligible to file for Chapter 13. In Chapter 13, you’ll work with the court to create a repayment plan that allows you to pay off a portion of your debts over a set period.

Chapter 13 bankruptcy can offer advantages like retaining your home or car, as it allows you to catch up on missed payments through the repayment plan. However, it requires a steady income to adhere to the payment schedule.

Exceptions and Special Circumstances

There are certain situations where the means test may not apply or where exceptions can be made:

• Disabled Veterans: If you’re a disabled veteran and your debts were incurred primarily during active duty, you might be exempt from the means test.

• Business Debts: If more than 50% of your debts are non-consumer debts (such as business-related debts), you may not be required to pass the means test.

Final Thoughts

The means test is a crucial element in the bankruptcy process, designed to ensure that Chapter 7 bankruptcy is reserved for those who truly need it. Understanding how the means test works and whether you qualify can help you make informed decisions about your financial future.

If you’re considering bankruptcy and are unsure whether you’ll pass the means test, consulting with a bankruptcy attorney is a wise step. They can guide you through the process, help you understand your options, and work with you to find the best path forward based on your unique financial situation.

Remember, bankruptcy is a legal tool meant to provide relief and a fresh start. The means test is just one step in that journey, and with the right guidance, you can navigate it successfully.