The means test made simple (sort of)

Breaking Down the Means Test

In basic terms, the means test tries to divert consumers with “above average” income into a chapter 13 repayment plan instead of chapter 7 bankruptcy. Put simply, the means test was designed to make it more difficult to file for chapter 7. To be sure, the means test is a complicated labrynth, best navigated with the help of a good bankruptcy attorney, however, in this post, we’ll try to take some of the mystery out of the process.

Does the Means Test Apply to Your Bankruptcy?

The first step is to determine whether the means test even applies. To find out, compare the income earned by your household in the last six months to the state average. If your household income (from all sources) is below your state’s average, the means test doesn’t come into play. You are presumptively entitled to file for chapter 7 bankruptcy. If your household income exceeds the state average, it will be necessary to perform the remaining portion of the test.

What are Your Monthly Expenses?

To determine whether you qualifies for chapter 7 bankruptcy under the means test, deduct your monthly expenses from current monthly income. This will provide a figure for net monthly income which will be used to see if chapter 7 bankruptcy is an option.

Keep in mind that your actual monthly expenses will not necessarily be the figures used for deductions. In many cases, standardized IRS deductions are used. Remember, the supposed purpose of the means test is to try to divert those who can afford to pay back debt into a chapter 13 plan. As a result, the amount a debtor has left over after expenses is a crucial factor in qualifying for chapter 7. Too much “disposable income” means that there is money left over at the end of the month to fund a chapter 13 plan. Beware: do it yourself means test calculators are notoriously undependable. If you’re considering bankruptcy and want an accurate assessment of disposable income, sit down with a bankruptcy attorney to crunch the numbers.

The Means Test Nitty Gritty

It all boils down to this:

- If, after expenses, you have $100 or less of disposable income the means test has been passed, you qualify for chapter 7 bankruptcy.

- If, after expenses, you have $166.67 or more left over as disposable income, you “fail” the means test and there is a presumption that chapter 13 is the appropriate route.

- If you have between $100 and $166.67 left over as disposable income, you pass the means test IF your monthly disposable income multiplied by 60 is less than 25 percent of your nonpriority unsecured debts (such as credit card debt).

No, it’s not just you, that got confusing pretty quickly. If you are considering filing for bankruptcy and have questions, consult an attorney.