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Means test – how does it impact you

The bankruptcy “means test” determines whether your average income in the six months prior to filing is low enough for you to file for Chapter 7 bankruptcy.  Conceptually this test is purposeful and seeks to keep high wage earners from filing for Chapter 7 bankruptcy. High-income filers who fail the means test can use Chapter 13 bankruptcy to repay a portion of their debts, but won’t be able to use Chapter 7 bankruptcy to wipe out their debts altogether.

However, having to take the Chapter 7 means test doesn’t mean that you must be penniless to use Chapter 7 bankruptcy. You can earn significant monthly income and still qualify for Chapter 7 bankruptcy if you have a lot of expenses, such as a high mortgage and car loan payments (although they must be reasonable), taxes, and other expenses.

How Does the Chapter 7 Means Test Work?

The means test was designed to limit the use of Chapter 7 bankruptcy to those who can’t pay their debts. By design the test deducts specific monthly expenses from your income (your average income over the six calendar months before you file for bankruptcy) to arrive at your monthly “disposable income.”

The higher your disposable income, the more likely you won’t be allowed to use Chapter 7 bankruptcy. Instead, you’re expected to use your disposable income to repay creditors.

Only bankruptcy filers with primarily consumer debts—not business debts—need to take the means test.

Step 1.  Determine whether your income is more or less than the median income in your state. If you earn more than the median, you must figure out whether you would have enough left over, after subtracting certain expenses, to repay some of your debt.

If your current monthly income is less than the median income for a household of your size in your state, you pass. You’re done. You do not need to complete the rest of the means test. You can file for Chapter 7.

Step 2.   Determine whether you have enough income left over (called “disposable income”), after paying your allowed monthly expenses, to pay off at least a portion of your unsecured debts (such as credit card bills). If your disposable income adds up to more than a certain amount, you fail the means test and cannot get a discharge by filing for Chapter 7 bankruptcy.

Median income levels vary by state and household size. Also, each county and metropolitan region have different allowed amounts for categories of expenses, such as necessities, housing, and transportation.  To see Connecticut and New York on the chart please press HERE

Business or Consumer Bankruptcy?

If your debt is primarily consumer debt, you have to pass the means test to receive a discharge of your debts.  However, if your bankruptcy is a business bankruptcy, you get to skip this step. You don’t have to take the means test.

A business bankruptcy is one in which the majority of the filer’s debt is business debt. By their very nature partnership, limited liability company, or corporation bankruptcy filings are straightforward. The filing will be a business bankruptcy.

However, an individual who files a personal case yet operates a business can—and probably will have a mix of business debt and consumer debt.  If the filer’s debt is primarily consumer in nature, the bankruptcy will be a consumer bankruptcy, even if the filer has some business debt, as well. Whichever type the filer has more of will determine the classification.

The official forms can help you determine if you pass or fail the means test.

Forms change routinely, please visit the U.S. Court’s website for the most recent versions the official bankruptcy forms.

If You Pass the Chapter 7 Means Test

Merely passing the means test doesn’t automatically qualify you to file for Chapter 7 bankruptcy. Another step exists. The court will look at two additional forms: Schedule I: Your Income and Schedule J: Your Expenses. If, after deducting your actual monthly expenses from your current monthly income, you have enough remaining to pay something to your creditors, the court might consider converting your Chapter 7 case to a Chapter 13 bankruptcy.

Passing the means test doesn’t necessarily mean you should file for Chapter 7 bankruptcy.  It simple means that Chapter 7 is an option to consider

If you don’t pass the means test, very often you may wish to consider using Chapter 13 bankruptcy.  This type of bankruptcy requires you to make monthly payments over a three- to five-year period according to a strict budget monitored by the court.

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