How Does the Chapter 7 Bankruptcy Means Test Work?

What Is the Chapter 7 Bankruptcy Means Test?

Chapter 7 bankruptcy means test is a mechanism the courts use to determine whether you qualify for Chapter 7 bankruptcy.

The means test calculates your monthly income and expenses, as well as any assets you have. This can include savings accounts, stocks, retirement accounts, and any property you own, including vehicles.

To pass the means test, you and your spouse must earn less than the state’s median income for your household size in the six months before your bankruptcy application.

There are exemptions where you might still be able to apply for Chapter 7 bankruptcy without passing the means test.

Consider hiring a leading bankruptcy attorney if you have questions about your Chapter 7 bankruptcy application.

What is Included in the Chapter 7 Means Test?

The means test considers multiple factors to determine if you qualify for Chapter 7 bankruptcy.

These factors are:

• Your current monthly income and disposable income. Subtract your expenses, such as taxes, mortgage, and insurance premiums, from your income to calculate your disposable income. Expenses are adjusted to national and local standards.

• If your disposable income is less than your total debts and expenses, including property taxes and insurance, you qualify for Chapter 7 bankruptcy protection.

• Your assets (including those not listed on your bankruptcy petition) are divided into three groups: real estate, personal property, and mixed assets (such as cash in banks, stocks, and bonds). Each group is scored separately based on how valuable it would be if sold at a public auction. A score is then calculated for a group of assets at an assumed price.

• Bankruptcy court uses the total score to decide if you qualify for Chapter 7 bankruptcy.

How Does the Bankruptcy Means Test Work?

Before filing a bankruptcy petition, the court requires all filers to submit a Chapter 7 Means Test calculation to ascertain their eligibility.

There are three ways to determine your eligibility for Chapter 7 bankruptcy:

• Form 122A-1: Statement of Current Monthly Income
• Form 122A-2: Means Test Calculation
• Form 122A-1Supp: Statement of Exemption from Presumption of Abuse

Statement of Current Monthly Income

The Statement of Current Monthly Income is the first step in determining eligibility for a Chapter 7 bankruptcy relief. It calculates your household income for the last six months and compares it to the state median income of your household size. If your average monthly income is below the state’s median income for your household size, then you qualify for Chapter 7 bankruptcy.

You are more likely to pass the means test if you have a modest income. However, if your income exceeds the state’s median income, you will need to fill out the remaining section of the application. The remaining section is known as the Means Test Calculation, which considers your living expenses in greater detail.

Means Test Calculation

The Means Test Calculation aims to provide a more accurate picture of your financial means by calculating your disposable income.

To work out your disposable income figure, you need to calculate your living expenses in greater detail and subtract these from your household income. The expenses are adjusted to national and local standards.

Examples of expenses to include are:

• Food, clothing, and health care expenses

• Housing, transport, and utility expenses

• Taxes

• Child support and alimony payments

• School and childcare expenses.

• Expenses incurred while caring for elderly or ill relatives.

You pass the means test if your disposable income is a negative number or a value near zero, you pass the means test.

If your disposable income is a positive number, you may still qualify for Chapter 7 bankruptcy relief by determining whether one of the exemptions to the means test applies to you.

Fill out the Statement of Exemption from Presumption of Abuse to determine your eligibility for exemptions.

Consider hiring a bankruptcy attorney to assist you with filling out these forms to ensure that you have filled them out correctly.

Exemptions from Presumption of Abuse

This form lists three different exemptions to the means test:

1. If your debts are primarily non-consumer or business debts. Your business debt needs to be more than 50% of the total debt.
2. If you are a disabled veteran who entered into your debts while on active duty or performing a homeland defense activity. To qualify, you need to have a disability rating of at least 30% and have been discharged from activity duty because of your disability.
3. If you are a military reservist or a National Guard member called to active duty after September 11, 2001

Speak to an experienced bankruptcy lawyer to determine whether any of these exemptions apply if you have difficulties passing your means test.

What if You Fail the Bankruptcy Means Test?

As a first step, you can seek the assistance of a trustworthy bankruptcy attorney to review the figures you used in the means test.

Suppose you anticipate earning less income in the next few months. In that case, you may like to postpone your bankruptcy application so that the income from the last six months includes a period where your income is lower.

Another alternative is to consider filing for a Chapter 13 bankruptcy instead.

Differences Between Chapter 7 and Chapter 13 Bankruptcy

Chapter 7 bankruptcy requires liquidation, which means selling assets and distributing the sales proceeds to creditors to repay your debt. In contrast, Chapter 13 bankruptcy involves the reorganization of assets.

Chapter 7 can take three to four months to discharge. On the other hand, Chapter 13 bankruptcy can only be discharged after completing all plan payments.

Only individuals can file Chapter 13, but individuals and businesses can file for Chapter 7.