What Is the “Means” Test?

Understanding the Means Test: A Guide to Determine Your Eligibility for Chapter 7 Bankruptcy

Declaring bankruptcy can be challenging, and deciding which type to file for can be even more difficult. For individuals struggling to pay off overwhelming debts, Chapter 7 bankruptcy is a popular option. However, only some are eligible for Chapter 7.

Understanding the means test can help determine whether you qualify and potentially make the bankruptcy process smoother. This blog will delve into the means test and explain the nuances you should know.

What is the Means Test?

The means test is a formula created by Congress to help determine whether an individual qualifies for Chapter 7 bankruptcy. The test considers your monthly income and expenses, calculates your disposable income, and compares it to the median income level in your state.

If your disposable income falls below the state median, you automatically qualify for Chapter 7. However, if your disposable income exceeds the median, you must go through additional calculations to determine your eligibility.

Calculating Disposable Income

To calculate disposable income, you must deduct your allowed monthly expenses, including rent, groceries, utilities, and other fixed costs, from your average monthly income over the past six months. If your disposable income comes up to less than $7,700 over five years, then you pass the test, and you qualify for Chapter 7. However, if your disposable income exceeds $12,850 over five years, you fail the means test's mechanical presumption based on household size and state median.

Special Circumstances

In some scenarios, even if you do not pass the means test, you can still qualify for Chapter 7. If you have home energy expenses that exceed 5% of your gross income, or if you are a disabled veteran who incurred most of your debts while on active duty, then you can qualify for Chapter 7 despite a higher disposable income. If you fail the means test, your attorney will explore whether one or more of these circumstances may allow you to qualify in combination with other legal strategies.

Bankruptcy Representation You Can Rely On

The means test can seem daunting and confusing, but understanding how it works can help you determine whether Chapter 7 bankruptcy is an option. However, remember that even if you don't pass the means test, it doesn't necessarily mean you can't still qualify for Chapter 7.