Qualifying For Chapter 7 Bankruptcy: The Means Test Made Simple (Sort of)
Much has been written about the now infamous means test; Congress’ answer to the credit card lobby’s complaints that too many Americans who could afford to pay back some of their debts were allowed to file for chapter 7 bankruptcy. The means test effectively tries to divert some consumers with “above average” income into a chapter 13 repayment plan. 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.
The first step is to 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.
Monthly Expenses
In determining whether a debtor qualifies for chapter 7 bankruptcy under the means test, it is necessary to deduct monthly expenses from current monthly income. This will provide a figure for the debtor’s 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 ostensible 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.
It all boils down to this:
- If, after expenses, there is $100 or less of disposable income the means test has been passed, the debtor may file for chapter 7 bankruptcy.
- If, after expenses, there is $166.67 or more left over as disposable income, the debtor fails the means test and there is a presumption that chapter 13 is the appropriate path.
- If there is between $100 and $166.67 left over as disposable income, the debtor passes the means test IF the monthly disposable income multiplied by 60 is less than 25 percent of her nonpriority unsecured debts (such as credit card debt).
If you are considering filing for bankruptcy, consult an attorney.
