The Bankruptcy Means Test
By Christie Nicholson, J.D. | Legally reviewed by Susan Mills Richmond, Esq. | Last reviewed June 10, 2024
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Just because you file for bankruptcy doesn't mean the judge will allow a discharge of your debts. You must meet specific criteria before the judge agrees to discharge your debts in a Chapter 7 bankruptcy. One critical requirement is that you meet the Chapter 7 means test.
The bankruptcy means test is an objective way for the trustee to determine if a debtor qualifies for a Chapter 7 bankruptcy. It also helps the U.S. bankruptcy courts minimize the number of bankruptcy cases.
Ultimately, the means test allows the trustee to distinguish debtors who genuinely need to discharge their debts from those who can afford to pay their creditors.
Here, we'll explain the means test and why the Bankruptcy Code requires petitioners to pass it before the court discharges their consumer debts. We'll also discuss how the means test works and whether certain petitioners are exempt from it.
If you're filing for bankruptcy, you should contact a bankruptcy lawyer right away.
When Did the U.S. Bankruptcy Courts Start Using the Means Test?
Until recently, it was easy for people to file Chapter 7 bankruptcy. Old bankruptcy law often made it relatively easy for filers to meet the criteria because bankruptcy courts used considerable discretion in determining eligibility.
However, in 2005, Congress passed the Bankruptcy Abuse Protection and Consumer Protection Act (BAPCPA). It intended to counteract the effects of what had been considered lenient and inconsistent standards. As a result, most filers must now pass the bankruptcy means test to qualify for Chapter 7 bankruptcy.
Why Do the Courts Use a Means Test?
The means test measures your ability to repay your debts. It examines your debts, income, and household expenses. The goal is to see if petitioners can repay their consumer debts over time rather than have the court discharge them entirely.
The means test can also tell the U.S. trustee whether a debtor qualifies for a Chapter 13 bankruptcy option. In Chapter 13, the debtor typically pays a portion of their debts back over a specific time period. Creditors prefer this type of bankruptcy because they get some of their money back.
If the courts believe your income supports repayment, they will deny your Chapter 7, and you may proceed under Chapter 13.
How Does the Means Test Work?
The Chapter 7 means test examines your income-to-debt ratio and determines your ability to repay your debts. The trustee reviews a statement of your current monthly income and compares it to your monthly expenses.
Some of the factors the trustee will consider include:
- The average monthly expenses for a household of your size
- Your actual expenses
- Your household income and annual income (from all sources)
- Extraordinary expenses such as childcare and healthcare
- Your family size and household size
- Credit card debt
- Prior efforts at debt relief programs
The court also requires a copy of your IRS paperwork and tax returns. This will help the court gauge your earning potential versus your actual income.
Below are the steps the bankruptcy courts will take when conducting the Chapter 7 means test.
Step 1: Comparing Income To State Averages
The first part of the Means Test compares:
- Your average monthly income for six months before filing for bankruptcy; and
- Your state's median family income
If a debtor's income is less than or equal to the state median, they can file for Chapter 7. The trustee will proceed with their bankruptcy petition without further examining your debts and income.
There's still a chance a bankruptcy trustee will determine you have enough income (after paying allowable expenses) to repay creditors in a Chapter 13 repayment plan. The Means Test is not a final “yes."
If the bankruptcy court agrees with the trustee, it may convert the Chapter 7 bankruptcy to a Chapter 13 bankruptcy.
The income calculation should include the following sources:
- Wages, salary, tips, bonuses, overtime, and commissions
- Gross income from a business, profession, or a farm
- Interest, dividends, and royalties
- Rental and real property income
- Regular child support or spousal support
- Unemployment compensation
- Pension and retirement income
- Workers' compensation
- Annuity payments
- State disability insurance
Income excluded from the calculation includes:
- Tax refunds
- Social Security retirement benefits
- Social Security Disability Insurance (SSDI)
- Supplemental Security Income (SSI)
- Temporary Assistance for Needy Families (TANF)
Step 2: Comparing Disposable Income
If the debtor makes more than their state's median income, the trustee must complete the second part of the means test to determine eligibility.
If there's enough disposable income left after paying allowed expenses to pay a portion of unsecured debt, you don't qualify for Chapter 7. The trustee will advise the court to amend your petition to a Chapter 13 repayment plan.
Explain Your Special Circumstances if You Fail the Means Test
A debtor who fails the bankruptcy means test may file for Chapter 7 anyway.
The trustee or a creditor will likely file a motion to dismiss the case or convert it to a Chapter 13 bankruptcy. The debtor can defend the motion by establishing the presence of special circumstances such as:
- A serious medical condition
- A call to active military duty
- To demonstrate the special circumstances, you must:
- Provide documentation for the expense or adjustment to your income; and
- Explain the necessity of the adjustment or expense
If the bankruptcy court allows the special circumstances and you pass the means test, it will grant your motion.
Chapter 7 Bankruptcy Forms
You must complete specific forms for the Chapter 7 means test. Contact a skilled bankruptcy attorney if you need help filling out these forms.
- Form 122A-1 or Chapter 7 Statement of Your Monthly Income (uscourts.gov)
- Form 122A-2 or Chapter 7 Means Test Calculation (uscourts.gov)
- Form 122A-1Supp or Statement of Exemption from Presumption of Abuse Under § 707(b)(2) (uscourts.gov)
These forms are available online. You can also get a hard copy of these forms from your local U.S. Bankruptcy Court Clerk.
Exemptions to the Chapter 7 Bankruptcy Means Test
Certain groups of debtors don't have to pass the means test. First, those with mostly non-consumer debts don't have to pass the means test.
Specifically, the bankruptcy means test doesn't apply to disabled veterans who took on debt while:
- On active duty
- Serving in homeland defense activities
- This exemption applies as long as:
- The veteran's disability rating is at least 30%
- The veteran acquired more than half their debt during active military duty or service in homeland defense
If a filer owes mainly business debts, the bankruptcy means test is inapplicable, and the debtor may file for bankruptcy under Chapter 7.
File for Chapter 13 Bankruptcy if You Fail the Means Test
A debtor that fails the means test may file for Chapter 13 bankruptcy. Chapter 13 places a filer's debt in a three to five-year repayment plan.
The plan must include the repayment of mandatory debts, such as priority and secured debts, and a portion of debts owed to nonpriority, unsecured creditors.
If you have questions about the means test or explaining special circumstances, a bankruptcy attorney can review the details of your case and explain your next steps.